Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods

@article{Grossman1987AssetPA,
  title={Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods},
  author={Sanford J. Grossman and Guy Laroque},
  journal={Wharton School: Finance (Topic)},
  year={1987}
}
We analyze a model of optimal consumption and portfolio selection in which consumption services are generated by holding a durable good. The durable good is illiquid in that a transaction cost must be paid when the good is sold. It is shown that optimal consumption is not a smooth function of wealth; it is optimal for the consumer to wait until a large change in wealth occurs before adjusting his consumption. As a consequence, the consumption based capital asset pricing model fails to hold… 
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