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The Role of Composite Habits in Asset Prices and Business Cycles: A Bayesian Approach

Author

Listed:
  • Alexandre Dmitriev
  • Qiaoxian He

Abstract

Habit formation defined over a composite measure of consumption and leisure helps align predicted asset pricing and business cycle moments with their observed counterparts. We employ Bayesian maximum-likelihood techniques to assess the empirical significance of generalized composite habits within a production-based asset pricing model. Using U.S. quarterly data on output, consumption, investment, and hours worked, our findings indicate a very high level of habit intensity and a moderate degree of habit persistence, although the data are less informative regarding the latter. Overall, the estimated model successfully matches the observed equity premium and key business cycle moments.

Suggested Citation

  • Alexandre Dmitriev & Qiaoxian He, 2025. "The Role of Composite Habits in Asset Prices and Business Cycles: A Bayesian Approach," Working Papers 024, University of Auckland, Economic Policy Center (EPC).
    • Handle: RePEc:cyc:wpaper:024
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    File URL: https://www.auckland.ac.nz/assets/business/our-research/docs/economic-policy-centre/024WP.pdf
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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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