By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
AbstractWe present a consumptionâ€based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the longâ€horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. The model captures much of the history of stock prices from consumption data. It explains the shortâ€and longâ€run equity premium puzzles despite a low and constant riskâ€free rate. The results are essentially the same whether we model stocks as a claim to the consumption stream or as a claim to volatile dividends poorly corelated with consumption. The model is driven by an independently and identically distributed consumption growth process and adds a slow â€moving external habit to the standard power utility function. These features generate slow countercyclical variation in risk premia. The model posits a fundamentally novel description of risk premia. Investors fear stocks primarily because they do poorly in recessions unrelated to the risks of longâ€run average consumption growth.
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Bibliographic InfoPaper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3119444.
Date of creation: 1999
Date of revision:
Publication status: Published in Journal of Political Economy
Other versions of this item:
- John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
- John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
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- By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
by Miguel in Simoleon Sense on 2010-09-04 01:36:09
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