Consumption Choices and Portfolio

Consumption choices and the estimation of portfolio: Assessment of the conditional Euler approach

Consumption choices and the estimation of portfolio: Assessment of the conditional Euler approach

Introduction

The theory of consumer behavior is far more applicable today with variety of distinctions to be made. There are varieties of portfolios available to the consumer and the choices have extended to a wider perspective in which the returns are high. The inter-temporal behavior of the consumer tells the amount that can be consumed in time t1 and the amount that can be saved or invested for the future expenses. This study will explain the choices that the consumer should opt for present depending on the value of the portfolio in the present times. The choice is no doubt an easy task but in the presence of some assumptions made in the inter temporal behavior to determine that in the presence of portfolio and risks which choice would be optimal and can earn the consumer better for the future.

This study deals with the portfolio choice and consumption uncertain future. It is divided into two distinct parts. The first addresses the problems associated with the use of the unit root to find whether the data is stationary or when the assumption of normality price is not met. Thus, in the first step, we assume that prices are represented by stable laws. An algorithm will then be developed for portfolio choice by defining a new measure of risk. In a second step, the incorporation of assets with nonlinear profiles gain has been seen with the help of a unit root test.

In the second part of the study, it has been discussed that the problems of portfolio choice in continuous time, where prices are represented by inter temporal process. After presenting the basic model and finite horizon complete markets, it has been presented with possible extension, considering an infinite horizon, and an economy with incomplete markets system. In the latter case, the incompleteness is the existence of a wage subject to permanent shocks against which the agent can not cover. Finally, a model has been developed with a random horizon.

Data Analysis

Test for Stationary Data

The stationary data is one of the major problems that find in the econometric analysis i.e. the time series data becomes unreliable when it is non - stationary. There is a vast presence of non - stationary points when the analysis of portfolios are done because there is continuous change in the portfolio rates and because of this change the inter-temporal choices of the consumers also becomes non - stationary. Thus the critical evaluation of the stationary data is important therefore unit root test has been applied in order to analyze the portfolios being stationary or not.

The third lag for the variables is considered as the optimum lag as discussed above but all the variables are showing a negative sign i.e. it offers a negative impact on the exchange rates as ...