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A Note On The Exact Solution Of Asset Pricing Models With Habit Persistence

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  • COLLARD, FABRICE
  • FÈVE, PATRICK
  • GHATTASSI, IMEN

Abstract

This paper provides a closed-form solution to a standard asset pricing model with habit formation when the growth rate of endowment follows a first-order Gaussian autoregressive process. We determine conditions that guarantee the existence of a stationary bounded equilibrium. The findings are useful because they allow to evaluate the accuracy of various approximation methods to nonlinear rational expectation models. Furthermore, they can be used to perform simulation experiments to study the finite sample properties of various estimation methods.

Suggested Citation

  • Collard, Fabrice & Fève, Patrick & Ghattassi, Imen, 2006. "A Note On The Exact Solution Of Asset Pricing Models With Habit Persistence," Macroeconomic Dynamics, Cambridge University Press, vol. 10(2), pages 273-283, April.
    • Handle: RePEc:cup:macdyn:v:10:y:2006:i:02:p:273-283_05
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    Cited by:

    1. Yu Chen & Thomas Cosimano & Alex Himonas, 2008. "Solving an asset pricing model with hybrid internal and external habits, and autocorrelated Gaussian shocks," Annals of Finance, Springer, vol. 4(3), pages 305-344, July.
    2. de Groot, Oliver, 2015. "Solving asset pricing models with stochastic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 308-321.
    3. Walter Pohl & Karl Schmedders & Ole Wilms, 2018. "Higher Order Effects in Asset Pricing Models with Long‐Run Risks," Journal of Finance, American Finance Association, vol. 73(3), pages 1061-1111, June.

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