By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
AbstractWe present a consumptionÃ¢â¬based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the longÃ¢â¬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 shortÃ¢â¬and longÃ¢â¬run equity premium puzzles despite a low and constant riskÃ¢â¬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 Ã¢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 longÃ¢â¬run average consumption growth.
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Bibliographic InfoPaper provided by Center for Research in Security Prices, Graduate School of Business, University of Chicago in its series CRSP working papers with number 412.
Date of creation: Aug 1994
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Web page: http://gsbwww.uchicago.edu/fac/finance/papers/
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Other versions of this item:
- Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
- 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.
- 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.
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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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- John Y. Campbell in Wikipedia (German)
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