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Surplus Consumption Ratio and Expected Stock Returns

Listed author(s):
  • Imen Ghatassi
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    Based on the Consumption{Based Asset Pricing Model (C)CAPM with habit formation of Campbell and Cochrane (1999), this paper provides empirical evidence in favour of the importance of habit persistence in asset pricing. Using U.S data, we show that the surplus consumption ratio is a strong predictor of excess returns at long{horizons and that it captures a component of expected returns, not explained by the consumption{wealth ratio. Moreover, this paper shows that the (C) CAPM with habit formation performs far better than the standard (C)CAPM in accounting for the cross{sectional variations in average excess returns on the 25 Fama{French portfolios sorted by size and book{to{market value.

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    Article provided by GENES in its journal Annals Of Economics and Statistics.

    Volume (Year): (2011)
    Issue (Month): 103-104 ()
    Pages: 245-271

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    Handle: RePEc:adr:anecst:y:2011:i:103-104:p:245-271
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