An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish stock and bond returns
We suggest an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane (1999), and we apply the approach on annual and quarterly Danish stock and bond returns. For comparative purposes we also estimate and test the standard CRRA model. In addition, we compare the pricing errors of the different models using Hansen and Jagannathan’s (1997) specification error measure. The main result is that for Denmark the Campbell-Cochrane model does not seem to perform markedly better than the CRRA model. For the long annual sample period covering more than 80 years there is absolutely no evidence of superior performance of the Campbell-Cochrane model. For the shorter and more recent quarterly data over a 20-30 year period, there is some evidence of counter-cyclical time-variation in the degree of risk-aversion, in accordance with the Campbell-Cochrane model, but the model does not produce lower pricing errors or more plausible parameter estimates than the CRRA model.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Engsted, Tom, 2002. " Measures of Fit for Rational Expectations Models," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 301-55, July.
- Li, Yuming & Zhong, Maosen, 2005. "Consumption habit and international stock returns," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 579-601, March.
- Lars Peter Hansen & Ravi Jagannathan, 1994.
"Assessing Specification Errors in Stochastic Discount Factor Models,"
NBER Technical Working Papers
0153, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-90, June.
- Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
- Tom Engsted & Stuart Hyde & Stig V. Møller, 2007.
"Habit Formation, Surplus Consumption and Return Predictability: International Evidence,"
CREATES Research Papers
2007-31, School of Economics and Management, University of Aarhus.
- Engsted, Tom & Hyde, Stuart & Møller, Stig V., 2010. "Habit formation, surplus consumption and return predictability: International evidence," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1237-1255, November.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Hansen, Lars Peter & Heaton, John & Luttmer, Erzo G J, 1995.
"Econometric Evaluation of Asset Pricing Models,"
Review of Financial Studies,
Society for Financial Studies, vol. 8(2), pages 237-74.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- John Y. Campbell, 2002.
"Consumption-Based Asset Pricing,"
Harvard Institute of Economic Research Working Papers
1974, Harvard - Institute of Economic Research.
- Stuart Hyde & Keith Cuthbertson & Dirk Nitzsche, 2005. "Resuscitating the C-CAPM: empirical evidence from France and Germany," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 337-357.
- Newey, Whitney K & West, Kenneth D, 1987.
"A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,"
Econometric Society, vol. 55(3), pages 703-08, May.
- Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- Stig V. Møller, 2007.
"Habit persistence: Explaining cross sectional variation in returns and time-varying expected returns,"
CREATES Research Papers
2007-07, School of Economics and Management, University of Aarhus.
- Møller, Stig Vinther, 2009. "Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 525-536, September.
- Møller, Stig Vinther, 2008. "Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns," Finance Research Group Working Papers F-2008-04, University of Aarhus, Aarhus School of Business, Department of Business Studies.
- 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.
- Stuart Hyde & Mohamed Sherif, 2005. "Consumption Asset Pricing Models: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(3), pages 343-363, 06.
When requesting a correction, please mention this item's handle: RePEc:aah:create:2008-12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.