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Asset Pricing, Habit Memory, and the Labor Market

  • Ivan Jaccard

    (The Wharton School)

The main contribution of this study is to develop a dynamic general equilibrium model linking financial markets to the real economy. In search of a unified framework, this study finds that a model with internal habit memory is able to generate asset pricing and business cycle predictions that are strongly supported by the data. In comparison to solutions present in the literature, the equity premium puzzle can be resolved in a model also able to explain the dynamics of hours worked and real wages. In addition, the proposed mechanism avoids the generation of excessive risk-free rate variations and amplifies the effects of technology shocks.

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File URL: http://ssrn.com/abstract=1031065
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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-23.

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Length: 39 pages
Date of creation: Jul 2007
Date of revision: Nov 2007
Handle: RePEc:chf:rpseri:rp0723
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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  1. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  2. Rudebusch, Glenn D. & Swanson, Eric T., 2008. "Examining the bond premium puzzle with a DSGE model," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S111-S126, October.
  3. Wayne E. Ferson & George M. Constantinides, 1991. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
  4. Morris A. Davis, 2010. "housing and the business cycle," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  5. Fatih Guvenen, 2009. "A Parsimonious Macroeconomic Model for Asset Pricing," Econometrica, Econometric Society, vol. 77(6), pages 1711-1750, November.
  6. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  7. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
  8. Jonathan Heathcote, 2003. "Housing and the Business Cycle," Working Papers gueconwpa~03-03-21, Georgetown University, Department of Economics.
  9. Jean-Pierre Danthine & John B. Donaldson, 2002. "Labour Relations and Asset Returns," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 41-64.
  10. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
  11. TallariniJr., Thomas D., 2000. "Risk-sensitive real business cycles," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 507-532, June.
  12. Danthine, Jean-Pierre & Donaldson, John B & Siconolfi, Paolo, 2005. "Distribution Risk and Equity Returns," CEPR Discussion Papers 5425, C.E.P.R. Discussion Papers.
  13. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  14. Wei, Chao, 2009. "A quartet of asset pricing models in nominal and real economies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 154-165, January.
  15. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
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