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Article: Rational inattention, long-run consumption risk, and portfolio choice
Title | Rational inattention, long-run consumption risk, and portfolio choice |
---|---|
Authors | |
Keywords | Aggregate Consumption Long-Run Consumption Risk Long-Term Portfolio Choice Rational Inattention |
Issue Date | 2010 |
Publisher | Academic Press. The Journal's web site is located at http://www.elsevier.com/locate/red |
Citation | Review Of Economic Dynamics, 2010, v. 13 n. 4, p. 843-860 How to Cite? |
Abstract | This paper explores how the introduction of rational inattention (RI) - that agents process information subject to finite channel capacity - affects optimal consumption and investment decisions in an otherwise standard intertemporal model of portfolio choice. We first explicitly derive optimal consumption and portfolio rules under RI and then show that introducing RI reduces the optimal share of savings invested in the risky asset because inattentive investors face greater long-run consumption risk. We also show that the investment horizon matters for portfolio allocation in the presence of RI, even if investment opportunities are constant and the utility function of investors is constant relative risk aversion. Second, after aggregating across investors, we show that introducing RI can better explain the observed joint dynamics of aggregate consumption and the equity return. Finally, we show that RI increases the implied equity premium because investors under RI face greater long-run consumption risk and thus require higher compensation in equilibrium. © 2010 Elsevier Inc. |
Persistent Identifier | http://hdl.handle.net/10722/177781 |
ISSN | 2023 Impact Factor: 2.3 2023 SCImago Journal Rankings: 3.582 |
ISI Accession Number ID | |
References |
DC Field | Value | Language |
---|---|---|
dc.contributor.author | Luo, Y | en_US |
dc.date.accessioned | 2012-12-19T09:39:53Z | - |
dc.date.available | 2012-12-19T09:39:53Z | - |
dc.date.issued | 2010 | en_US |
dc.identifier.citation | Review Of Economic Dynamics, 2010, v. 13 n. 4, p. 843-860 | en_US |
dc.identifier.issn | 1094-2025 | en_US |
dc.identifier.uri | http://hdl.handle.net/10722/177781 | - |
dc.description.abstract | This paper explores how the introduction of rational inattention (RI) - that agents process information subject to finite channel capacity - affects optimal consumption and investment decisions in an otherwise standard intertemporal model of portfolio choice. We first explicitly derive optimal consumption and portfolio rules under RI and then show that introducing RI reduces the optimal share of savings invested in the risky asset because inattentive investors face greater long-run consumption risk. We also show that the investment horizon matters for portfolio allocation in the presence of RI, even if investment opportunities are constant and the utility function of investors is constant relative risk aversion. Second, after aggregating across investors, we show that introducing RI can better explain the observed joint dynamics of aggregate consumption and the equity return. Finally, we show that RI increases the implied equity premium because investors under RI face greater long-run consumption risk and thus require higher compensation in equilibrium. © 2010 Elsevier Inc. | en_US |
dc.language | eng | en_US |
dc.publisher | Academic Press. The Journal's web site is located at http://www.elsevier.com/locate/red | en_US |
dc.relation.ispartof | Review of Economic Dynamics | en_US |
dc.subject | Aggregate Consumption | en_US |
dc.subject | Long-Run Consumption Risk | en_US |
dc.subject | Long-Term Portfolio Choice | en_US |
dc.subject | Rational Inattention | en_US |
dc.title | Rational inattention, long-run consumption risk, and portfolio choice | en_US |
dc.type | Article | en_US |
dc.identifier.email | Luo, Y: yluo@econ.hku.hk | en_US |
dc.identifier.authority | Luo, Y=rp01083 | en_US |
dc.description.nature | link_to_subscribed_fulltext | en_US |
dc.identifier.doi | 10.1016/j.red.2010.01.002 | en_US |
dc.identifier.scopus | eid_2-s2.0-77956228546 | en_US |
dc.identifier.hkuros | 170295 | - |
dc.relation.references | http://www.scopus.com/mlt/select.url?eid=2-s2.0-77956228546&selection=ref&src=s&origin=recordpage | en_US |
dc.identifier.volume | 13 | en_US |
dc.identifier.issue | 4 | en_US |
dc.identifier.spage | 843 | en_US |
dc.identifier.epage | 860 | en_US |
dc.identifier.eissn | 1096-6099 | - |
dc.identifier.isi | WOS:000281944600007 | - |
dc.publisher.place | United States | en_US |
dc.identifier.scopusauthorid | Luo, Y=23767888300 | en_US |
dc.identifier.citeulike | 6661638 | - |
dc.identifier.issnl | 1094-2025 | - |