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Testing Habits In An Asset Pricing Model

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Author Info

  • Melisso Boschi
  • Stefano d'Addona
  • Aditya Goenka

    ()
    (Ministry of Economics and Finance (Italy), University of Roma Tre, National University of Singapore)

Abstract

We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on the US postwar economy. The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.

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File URL: http://host.uniroma3.it/centri/crei/pubblicazioni/workingpapers2009/CREI_05_2009.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by CREI Università degli Studi Roma Tre in its series Working Papers with number 0509.

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Length: 27 pages
Date of creation: 2009
Date of revision: 2009
Handle: RePEc:rcr:wpaper:05_09

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Related research

Keywords: Habit formation; Equity premium; Business cycle; Markovswitching VAR models;

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References

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  1. Wayne E. Ferson & George M. Constantinides, 1992. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
  2. Melisso Boschi & Aditya Goenka, 2007. "Relative Risk Aversion And The Transmission Of Financial Crises," CAMA Working Papers 2007-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Phillip A. Braun & George M. Constantinides & Wayne E. Ferson, 1992. "Time Nonseparability in Aggregate Consumption: International Evidence," NBER Working Papers 4104, National Bureau of Economic Research, Inc.
  4. Melisso Boschi & Aditya Goenka, 2007. "Relative Risk Aversion And The Transmission Of Financial Crises," CAMA Working Papers 2007-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  5. Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2003. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Economics Letters, Elsevier, vol. 78(3), pages 295-299, March.
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Cited by:
  1. M Boschi & S d'Addona & A Goenka, 2012. "Testing external habits in an asset pricing model," CAMA Working Papers 2012-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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