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Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns

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  • Møller, Stig Vinther

    () (Department of Business Studies, Aarhus School of Business)

Abstract

This paper finds empirical support for the habit persistence model of Campbell and Cochrane (1999) along both cross-sectional and time-series dimensions of the US stock market over the period 1947-2005. GMM estimations show that the model is able to explain a substantial part of the cross-sectional variation in returns on the 25 Fama and French value and size portfolios, although it has difficulties in fully explaining the value premium. In addition, the model accounts for time-varying expected returns on stocks. The surplus consumption ratio forecasts future stock returns and the forecasting power is not diminished by including the 1990s stock market boom. The extended version of the model allows for cyclical variation in interest rates and provides a reasonable fit of the real risk free rate.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2008-04.

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Length: 31 pages
Date of creation: 19 Mar 2008
Date of revision:
Handle: RePEc:hhb:aarbfi:2008-04

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research

Keywords: Campbell-Cochrane model; 25 Fama-French portfolios; GMM; return predictability by surplus-consumption ratio;

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References

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Citations

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Cited by:
  1. Manuel A. Gómez, 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1.
  2. Benjamin R. Auer, 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(5), pages 518-544, September.
  3. Tom Engsted & Stig V. Møller, 2008. "An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish stock and bond returns," CREATES Research Papers 2008-12, School of Economics and Management, University of Aarhus.
  4. Christian Bach & Stig Vinther Møller, 2010. "Habit-based Asset Pricing with Limited Participation Consumption," CREATES Research Papers 2010-46, School of Economics and Management, University of Aarhus.
  5. Engsted, Tom & Hyde, Stuart & Møller, Stig V., 2010. "Habit formation, surplus consumption and return predictability: International evidence," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1237-1255, November.

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