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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. Glenn D. Rudebusch & Eric T. Swanson, 2008. "Examining the bond premium puzzle with a DSGE model," Working Paper Series 2007-25, Federal Reserve Bank of San Francisco.
  3. 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.
  4. Fatih Guvenen, 2009. "A parsimonious macroeconomic model for asset pricing," Staff Report 434, Federal Reserve Bank of Minneapolis.
  5. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  7. 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.
  8. 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.).
  9. Wayne E. Ferson & George M. Constantinides, 1991. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
  10. 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.
  11. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
  12. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  13. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  14. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
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Citations

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Cited by:
  1. Jaccard, Ivan, 2012. "Asset pricing and housing supply in a production economy," Working Paper Series 1454, European Central Bank.
  2. Francois Gourio, 2012. "Disaster Risk and Business Cycles," American Economic Review, American Economic Association, vol. 102(6), pages 2734-66, October.
  3. Gourio, François, 2011. "Credit Risk and Disaster Risk," CEPR Discussion Papers 8201, C.E.P.R. Discussion Papers.
  4. Borenstein, Eliezer & Elkayam, David, 2013. "The equity premium in a small open economy, and an application to Israel," MPRA Paper 43909, University Library of Munich, Germany.
  5. Gourio, François, 2012. "Macroeconomic implications of time-varying risk premia," Working Paper Series 1463, European Central Bank.
  6. Ivan Jaccard, 2010. "Asset Pricing and Housing Supply in a Production Economy," 2010 Meeting Papers 605, Society for Economic Dynamics.
  7. Christoffel, Kai & Jaccard, Ivan & Kilponen, Juha, 2011. "Government bond risk premia and the cyclicality of fiscal policy," Working Paper Series 1411, European Central Bank.
  8. Peter A. Schmid, 2013. "The destabilizing effect of company income taxation," Society and Economy, Akadémiai Kiadó, Hungary, vol. 35(3), pages 365-388, September.

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