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The Fragile Benefits of Endowment Destruction

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  • John Y. Campbell
  • John H. Cochrane

Abstract

The benefits of endowment destruction documented by Ljungqvist and Uhlig (2015), and the related possibility that consumption can lower habits, are fragile. Both issues result from a particular way of discretely approximating the underlying continuous-time model or of adapting it to jumps. Other ways of calculating the discrete-time approximation or extending the model to jumps easily overturn the results, while making no difference to the model's description of asset prices and quantities. This analysis gives an example of how to extend models so that the jump gives the same result as a jump limit of continuous-sample-path movements.

Suggested Citation

  • John Y. Campbell & John H. Cochrane, 2015. "The Fragile Benefits of Endowment Destruction," Journal of Political Economy, University of Chicago Press, vol. 123(5), pages 1214-1226.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/681640
    DOI: 10.1086/681640
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    References listed on IDEAS

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    1. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    2. John H. Cochrane, 2016. "The Habit Habit," Economics Working Papers 16105, Hoover Institution, Stanford University.
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