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An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence

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  • Marquering, Wessel
  • Verbeek, Marno

Abstract

In intertemporal asset pricing models, transaction costs are usually neglected. In this paper we explicitly incorporate transaction costs in these models and analyze to what extent this extension is helpful in explaining the cross-section of expected returns. An empirical analysis using CRSP data on size-based portfolios examines the role of the transaction costs and shows that incorporating such costs in the consumption-based model with power utility does not yield satisfactory results. However, the introduction of habit persistence substantially improves the model. We find rather strong evidence of habit persistence in monthly consumption data. The plots of the models' pricing errors indicate that the asset pricing model with transaction costs and habit persistence does explain the cross-sectional variation in the portfolio returns quite accurately.
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  • Marquering, Wessel & Verbeek, Marno, 1999. "An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 243-265, September.
  • Handle: RePEc:eee:empfin:v:6:y:1999:i:3:p:243-265
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    Cited by:

    1. Andros Gregoriou & Christos Ioannidis & Sugata Ghosh, 2009. "Heterogeneous time varying transaction costs and asset pricing in international equity markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 23(3), pages 271-283, September.
    2. Hunter, John & Wu, Feng, 2014. "Multifactor consumption based asset pricing models using the US stock market as a reference: Evidence from a panel of developed economies," Economic Modelling, Elsevier, vol. 36(C), pages 557-565.
    3. Gregoriou, Andros & Nguyen, Ngoc Dung, 2010. "Stock liquidity and investment opportunities: New evidence from FTSE 100 index deletions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(3), pages 267-274, July.

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