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Asset Pricing, Habit Memory, and the Labor Market

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  • Ivan Jaccard

    (The Wharton School)

Abstract

The main contribution of this study is to develop a dynamic general equilibrium model linking financial markets to the real economy. In search of a unified framework, this study finds that a model with internal habit memory is able to generate asset pricing and business cycle predictions that are strongly supported by the data. In comparison to solutions present in the literature, the equity premium puzzle can be resolved in a model also able to explain the dynamics of hours worked and real wages. In addition, the proposed mechanism avoids the generation of excessive risk-free rate variations and amplifies the effects of technology shocks.

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Bibliographic Info

Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-23.

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Length: 39 pages
Date of creation: Jul 2007
Date of revision: Nov 2007
Handle: RePEc:chf:rpseri:rp0723

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Web page: http://www.SwissFinanceInstitute.ch
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Related research

Keywords: business cycle; equity premium puzzle; adjustment costs; habit formation; labor market.;

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References

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  1. Wei, Chao, 2009. "A quartet of asset pricing models in nominal and real economies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 154-165, January.
  2. Jean-Pierre DANTHINE & John B. DONALDSON & Paolo SICONOLFI, 2005. "Distribution Risk and Equity Returns," FAME Research Paper Series rp161, International Center for Financial Asset Management and Engineering.
  3. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  4. Morris Davis & Jonathan Heathcote, 2004. "Housing and the business cycle," Finance and Economics Discussion Series 2004-11, Board of Governors of the Federal Reserve System (U.S.).
  5. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," NBER Working Papers 15243, National Bureau of Economic Research, Inc.
  6. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  7. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S111-S126, October.
  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  9. Danthine, Jean-Pierre & Donaldson, John B, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 41-64, January.
  10. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
  11. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers 6683, National Bureau of Economic Research, Inc.
  12. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  13. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  14. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
  15. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
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Citations

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Cited by:
  1. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
  2. Ivan Jaccard, 2011. "Asset Pricing and Housing Supply in a Production Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 33.
  3. François Gourio, 2009. "Disasters Risk and Business Cycles," NBER Working Papers 15399, National Bureau of Economic Research, Inc.
  4. Francois Gourio, 2010. "Credit risk and Disaster risk," 2010 Meeting Papers 112, Society for Economic Dynamics.
  5. Francois Gourio, 2009. "Disaster risk and business cycles," 2009 Meeting Papers 1176, Society for Economic Dynamics.
  6. Kai Christoffel & Ivan Jaccard & Juha Kilponen, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.
  7. François Gourio, 2012. "Macroeconomic implications of time-varying risk premia," Working Paper Series 1463, European Central Bank.

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