Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-23T21:34:51.935Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal Consumption and Investment under Time-Varying Liquidity Constraints

Published online by Cambridge University Press:  14 September 2018

Seryoong Ahn ,
Kyoung Jin Choi  and
Byung Hwa Lim
Get access Rights & Permissions [Opens in a new window]

Abstract

We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1643 - 1681
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are very grateful to an anonymous referee, Hendrik Bessembinder (the editor), Mariana Khapko, Hyeng Keun Koo, and seminar participants in the 2015 Northern Finance Association meeting for their helpful comments. Ahn was supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education (NRF-2014S1A3A2036037). Lim was supported by a National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A8018920).

References

Andrews, D., and Sánchez, A. C.. “The Evolution of Homeownership Rates in Selected OECD Countries: Demographic and Public Policy Influences.” OECD Journal: Economic Studies, 8 (2011), 1–37.Google Scholar
Baker, S. R.“Debt and the Consumption Response to Household Income Shocks.” Working Paper, Stanford University (2015).Google Scholar
Bick, B.; Kraft, H.; and Munk, C.. “Solving Constrained Consumption-Investment Problems by Simulation of Artificial Market Strategies.” Management Science, 59 (2013), 485–503.Google Scholar
Campbell, J., and Cocco, J. F.. “How Do House Prices Affect Consumption? Evidence from Micro Data.” Journal of Monetary Economics, 54 (2007), 591–621.Google Scholar
Campbell, J., and Mankiw, J.. “The Response of Consumption to Income: A Cross-Country Investigation.” European Economic Review, 35 (1991), 723–767.Google Scholar
Choi, K. J.; Koo, H. K.; Lim, B. H.; and Yoo, J.. “The Determinants of Unsecured Credit Constraint.” Working Paper, Ajou University (2015).Google Scholar
Choi, K. J.; Shim, G.; and Shin, Y. H.. “Optimal Portfolio, Consumption-Leisure and Retirement Choice Problem with CES Utility.” Mathematical Finance, 18 (2008), 445–472.Google Scholar
Cocco, J. F.; Gomes, F. J.; and Maenhout, P. J.. “Consumption and Portfolio Choice over the Lifecycle.” Review of Financial Studies, 18 (2005), 491–533.Google Scholar
Cvitanić, J., and Karatzas, I.. “Convex Duality in Constrained Portfolio Optimization.” Annals of Applied Probability, 2 (1992), 767–818.Google Scholar
Detemple, J., and Serrat, A.. “Dynamic Equilibrium with Liquidity Constraints.” Review of Financial Studies, 16 (2003), 597–629.Google Scholar
Duffie, D.; Fleming, W. H.; Soner, H. M.; and Zariphopoulou, T.. “Hedging in Incomplete Markets with HARA Utility.” Journal of Economic Dynamics and Control, 21 (1997), 753–782.Google Scholar
Dybvig, P. H., and Liu, H.. “Lifetime Consumption and Investment: Retirement and Constrained Borrowing.” Journal of Economic Theory, 145 (2010), 885–907.Google Scholar
Dybvig, P. H., and Liu, H.. “Verification Theorems for Models of Consumption and Investment with Retirement and Constrained Borrowing.” Mathematics of Operations Research, 36 (2011), 620–635.Google Scholar
Dynan, K.“Is a Household Debt Overhang Holding Back Consumption?” Brookings Papers on Economic Activity, Spring (2012), 299–362.Google Scholar
El Karoui, N., and Jeanblanc-Picqué, M.. “Optimization of Consumption with Labor Income.” Finance Stochastics, 2 (1998), 409–440.Google Scholar
Farhi, E., and Panageas, S.. “Saving and Investing for Early Retirement: A Theoretical Analysis.” Journal of Financial Economics, 83 (2007), 87–121.Google Scholar
He, H., and Pagès, H. F.. “Labor Income, Borrowing Constraints, and Equilibrium Asset Prices.” Economic Theory, 3 (1993), 663–696.Google Scholar
Jappelli, T.“Who Is Credit Constrained in the U.S. Economy?” Quarterly Journal of Economics, 105 (1990), 219–234.Google Scholar
Justiniano, A.; Primiceri, G. E.; and Tambalotti, A.. “Household Leveraging and Deleveraging.” Review of Economic Dynamics, 18 (2015), 3–20.Google Scholar
Karatzas, I.; Lehoczky, J. P.; Shreve, S.; and Xu, G.. “Martingale and Duality Methods for Utility Maximization in an Incomplete Market.” SIAM Journal on Control and Optimization, 29 (1991), 702–730.Google Scholar
Kiyotaki, N., and Moore, J.. “Credit Cycles.” Journal of Political Economy, 105 (1997), 211–248.Google Scholar
Koo, H. K.“Consumption and Portfolio Selection with Labor Income: A Continuous Time Approach.” Mathematical Finance, 8 (1998), 49–65.Google Scholar
Ludvigson, S.“Consumption and Credit: A Model of Time-Varying Liquidity Constraints.” Review of Economics and Statistics, 81 (1999), 434–447.Google Scholar
Lynch, A. W., and Tan, S.. “Labor Income Dynamics at Business-Cycle Frequencies: Implications for Portfolio Choice.” Journal of Financial Economics, 101 (2011), 333–359.Google Scholar
Mian, A. R.; Rao, K.; and Sufi, A.. “Household Balance Sheets, Consumption, and the Economic Slump.” Quarterly Journal of Economics, 128 (2013), 1687–1726.Google Scholar
Munk, C.“Optimal Consumption-Investment Policies with Undiversifiable Income Risk and Liquidity Constraints.” Journal of Economic Dynamics and Control, 24 (2000), 1315–1343.Google Scholar
Munk, C., and Sørensen, C.. “Dynamic Asset Allocation with Stochastic Income and Interest Rates.” Journal of Financial Economics, 96 (2010), 433–462.Google Scholar
Rampini, A., and Viswanathan, S.. “Household Risk Management.” Working Paper, National Bureau of Economic Research (2015).Google Scholar
Shreve, S. Stochastic Calculus for Finance, Volume II: Continuous-Time Models. New York, NY: Springer-Verlag (2004).Google Scholar
Sinai, T., and Souleles, N. S.. “Owner-Occupied Housing as a Hedge against Rent Risk.” Quarterly Journal of Economics, 120 (2005), 763–789.Google Scholar
Zeldes, S.“Consumption and Liquidity Constraints: An Empirical Investigation.” Journal of Political Economy, 97 (1989), 305–346.Google Scholar
Supplementary material: File

Ahn et al. supplementary material

Ahn et al. supplementary material 1

Download Ahn et al. supplementary material(File)
File 156.3 KB