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Optimal Consumption and Investment under Time-Varying Liquidity Constraints

Published online by Cambridge University Press:  14 September 2018

Seryoong Ahn ,
Kyoung Jin Choi  and
Byung Hwa Lim
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Abstract

We study consumption and investment decisions given realistic time-varying constraints on borrowing. We first consider the case where borrowing is constrained by a maximum debt-to-income ratio. We then consider collateral borrowing with a maximum loan-to-value ratio. The resulting implications for optimal policies differ considerably from those obtained in the existing literature based on fixed borrowing limits but are consistent with those documented in the empirical literature.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 4 , August 2019 , pp. 1643 - 1681
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We are very grateful to an anonymous referee, Hendrik Bessembinder (the editor), Mariana Khapko, Hyeng Keun Koo, and seminar participants in the 2015 Northern Finance Association meeting for their helpful comments. Ahn was supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education (NRF-2014S1A3A2036037). Lim was supported by a National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5A8018920).

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