Consumption and portfolio choice under internal multiplicative habit formation

Servaas van Bilsen, Lans Bovenberg, R.J.A. Laeven

Research output: Contribution to journalArticleScientificpeer-review

4 Citations (Scopus)


This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities by developing a nontrivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock–bond investments. We also show that in a setting that combines habit formation with Epstein–Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.
Original languageEnglish
Pages (from-to)2334 - 2371
Number of pages38
JournalJournal of Financial and Quantitative Analysis
Issue number7
Publication statusPublished - 1 Nov 2020


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