University of Hertfordshire

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  • S58

    Final published version, 555 KB, PDF document

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Original languageEnglish
PublisherUniversity of Hertfordshire
Publication statusPublished - 2005

Publication series

NameBusiness School Working Papers
PublisherUniversity of Hertfordshire
VolumeUHBS 2005-6

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.

ID: 82906