An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence
AbstractIn intertemporal asset pricing models, transaction costs are usually neglected. In this paper we explicitly incorporate transaction costs in these models and analyze to what extent this extension is helpful in explaining the cross-section of expected returns. An empirical analysis using CRSP data on size-based portfolios examines the role of the transaction costs and shows that incorporating such costs in the consumption-based model with power utility does not yield satisfactory results. However, the introduction of habit persistence substantially improves the model. We find rather strong evidence of habit persistence in monthly consumption data. The plots of the models' pricing errors indicate that the asset pricing model with transaction costs and habit persistence does explain the cross-sectional variation in the portfolio returns quite accurately.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 6 (1999)
Issue (Month): 3 (September)
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Web page: http://www.elsevier.com/locate/jempfin
Other versions of this item:
- Wessel Marquering & Marno Verbeek, 1998. "An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence," Center for Economic Studies - Discussion papers ces9824, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
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