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Asset Prices in an Exchange Economy with Habit Formation

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Author Info
Detemple, Jerome B
Zapatero, Fernando
Abstract

This paper analyzes asset prices in a representative agent exchange economy with habit-forming preferences. For a general class of utility indices and endowment processes, the authors characterize the optimal demand for consumption and derive explicit solutions for the interest rate and asset risk premia. They show that consumption smoothness may obtain even when the interest rate is stochastic. The consumption capital asset pricing model may not hold when the endowment process has stochastic coefficients; asset risk premia are larger under mild assumptions. The interest rate depends on the growth in the standard of living. Malliavin calculus is employed in the analysis. Copyright 1991 by The Econometric Society.

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Publisher Info
Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 59 (1991)
Issue (Month): 6 (November)
Pages: 1633-57
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Handle: RePEc:ecm:emetrp:v:59:y:1991:i:6:p:1633-57

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  1. Kris Jacobs, 2001. "Estimating Nonseparable Preference Specifications for Asset Market Participants," CIRANO Working Papers 2001s-12, CIRANO. [Downloadable!]
  2. Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October. [Downloadable!] (restricted)
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  3. Giuseppe Ferraguto & Patrizio Pagano, 2003. "Endogenous Growth with Intertemporally Dependent Preferences," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
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  4. Tano Santos & Pietro Veronesi, 2004. "Conditional Betas," NBER Working Papers 10413, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Mark Broadie & Jérôme B. Detemple & Eric Ghysels & Olivier Torrès, 1996. "American Options with Stochastic Dividends and Volatility: A Nonparametric Investigation," CIRANO Working Papers 96s-26, CIRANO. [Downloadable!]
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  6. Bernard Dumas & Alexander Kurshev & Raman Uppal, 2007. "Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility," NBER Working Papers 13401, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Amartya Lahiri & Mikko Puhakka, 1996. "Habit Persistence in Overlapping Generations Economies Under Pure Exchange," UCLA Economics Working Papers 754, UCLA Department of Economics. [Downloadable!]
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  8. Phillip A. Braun & George M. Constantinides & Wayne E. Ferson, 1992. "Time Nonseparability in Aggregate Consumption: International Evidence," NBER Working Papers 4104, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Arjen Siegmann, 2003. "Shortfall allowed: loss aversion and habit formation," WO Research Memoranda (discontinued) 741, Netherlands Central Bank, Research Department. [Downloadable!]
  10. Aase, Knut K., 2004. "Jump Dynamics: The Equity Premium and the Risk-Free Rate Puzzles," Discussion Papers 2004/12, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  11. Wayne E. Ferson & Ravi Jagannathan, 1996. "Econometric evaluation of asset pricing models," Staff Report 206, Federal Reserve Bank of Minneapolis. [Downloadable!]
  12. Tahir Choulli & Christophe Stricker & Jia Li, 2007. "Minimal Hellinger martingale measures of order q," Finance and Stochastics, Springer, vol. 11(3), pages 399-427, July. [Downloadable!] (restricted)
  13. Tano Santos & Pietro Veronesi, 2005. "Cash-Flow Risk, Discount Risk, and the Value Premium," NBER Working Papers 11816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Paul Ehling, 2004. "Consumption, Portfolio Policies and Dynamic Equilibrium in the Presence of Preference for Ownership," Econometric Society 2004 North American Winter Meetings 311, Econometric Society.
  15. Jacobs, Kris, 2000. "Estimating Nonseparable Preference Specifications for Asset Market Participants," Econometric Society World Congress 2000 Contributed Papers 1472, Econometric Society. [Downloadable!]
  16. Dumas, Bernard J & Kurshev, Alexander & Uppal, Raman, 2007. "Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility," CEPR Discussion Papers 6455, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  17. Jérôme B. Detemple & Christos I. Giannikos, 1995. "Asset and Commodity Prices with Multiattribute Durable Goods," CIRANO Working Papers 95s-47, CIRANO. [Downloadable!]
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  18. Kris Jacobs, 2002. "The Rate of Risk Aversion May Be Lower Than You Think," CIRANO Working Papers 2002s-08, CIRANO. [Downloadable!]
  19. Kris Jacobs & Kevin Q. Wang, 2002. "Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns," CIRANO Working Papers 2002s-11, CIRANO. [Downloadable!]
  20. Yeung Lewis Chan & Leonid Kogan, . "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Rodney L. White Center for Financial Research Working Papers 14-00, Wharton School Rodney L. White Center for Financial Research. [Downloadable!]
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