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 InfoPaper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces9824.
Date of creation: Mar 1998
Date of revision:
Other versions of this item:
- Marquering, Wessel & Verbeek, Marno, 1999. "An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 243-265, September.
- NEP-ALL-2008-04-21 (All new papers)
- NEP-CBA-2008-04-21 (Central Banking)
- NEP-DGE-2008-04-21 (Dynamic General Equilibrium)
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