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Asset prices under habit formation and catching up with the Jones

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  • A. Abel

Abstract

This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer’s level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 1395.

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Date of creation: 09 Dec 2010
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Handle: RePEc:cla:levarc:1395

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Web page: http://www.dklevine.com/

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  1. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. James M. Nason, 1988. "The equity premium and time-varying risk behavior," Finance and Economics Discussion Series 11, Board of Governors of the Federal Reserve System (U.S.).
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Consumption Contagion and Income Inequality
    by noreply@blogger.com (Carola Binder) in Quantitative Ease on 2014-03-31 19:20:00
  2. Status and Asset Pricing Thread Taking Baby Steps
    by Eric Falkenstein in Falkenblog on 2010-07-13 13:11:00
  3. Status and Asset Pricing Thread Taking Baby Steps
    by Eric Falkenstein in Falkenblog on 2010-07-13 13:11:00
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