TITLE

Consumption, Wealth, and Indebtedness in the Context of Uncertainty: The Consumption Function Meets Portfolio Theory

AUTHOR(S)
Bywaters, David; Thomas, D. Gareth
PUB. DATE
August 2006
SOURCE
International Advances in Economic Research;Aug2006, Vol. 12 Issue 3, p298
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis (LCH) model of consumption. Modern versions of this LCH theory almost always assume that utility is additive over time, but in this study, the multiplicative Cobb�Douglas function is used. The new synthesis also explains the stochastic properties of consumption more fully and clearly than previous studies, in particular the uncertainty arising from rates of return on risky assets. The new theory will also help to improve the explanation of the surprise changes in consumption because these sources of risk are incorporated explicitly into the analysis.
ACCESSION #
22930452

Tags: CONSUMPTION (Economics);  WEALTH;  DEBT;  RATE of return;  PORTFOLIO management (Investments);  CAPITAL assets pricing model;  CAPITAL

 

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