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Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns

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  • Møller, Stig Vinther

Abstract

This paper uses an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane [Campbell, J.Y., Cochrane, J.H., 1999. By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205-251] on the US stock market. The empirical evidence shows that the model is able to explain the size premium, but fails to explain the value premium. Further, the state variable of the model - the surplus consumption ratio - explains counter-cyclical time-varying expected returns on stocks. The model also produces plausible low real risk-free rates despite high relative risk aversion.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (September)
Pages: 525-536

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Handle: RePEc:eee:empfin:v:16:y:2009:i:4:p:525-536

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Web page: http://www.elsevier.com/locate/jempfin

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Keywords: Campbell-Cochrane model 25 Fama-French portfolios GMM Return predictability by surplus consumption ratio;

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References

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Citations

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Cited by:
  1. Christian Bach & Stig Vinther Møller, 2010. "Habit-based Asset Pricing with Limited Participation Consumption," CREATES Research Papers 2010-46, School of Economics and Management, University of Aarhus.
  2. Tom Engsted & Stuart Hyde & Stig V. Møller, 2007. "Habit Formation, Surplus Consumption and Return Predictability: International Evidence," CREATES Research Papers 2007-31, School of Economics and Management, University of Aarhus.
  3. Benjamin R. Auer, 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(5), pages 518-544, September.
  4. Auer, Benjamin R., 2013. "Can habit formation under complete market integration explain the cross-section of international equity risk premia?," Review of Financial Economics, Elsevier, vol. 22(2), pages 61-67.
  5. Tom Engsted & Stig V. M�ller, 2010. "An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish Stock and bond returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 213-227.
  6. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, January.

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