Ratchet vs Blasé Investors and Asset Markets * Ratchet vs Blasé Investors and Asset Markets

Abstract This paper proposes a new wealth-dependent utility function for the intertemporal consumption and portfolio problem, in which the subsistance (marginal utility bliss) consumption level is a function of wealth. Ratchet effects obtain when higher wealth increases the subsistance consumption level; blasé behavior occurs when higher wealth reduces it. We have three contributions: (i) we identify closedform solutions for optimal consumption and portfolio rules; (ii) we use the optimal rules to estimate the model using aggregate portfolio data, and (iii) we derive and discuss the pricing implications of our results. When financial assets and wealth are considered, our estimates are consistent with blasé behavior and counter-cyclical risk aversion. JEL classification: G11, G12