IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Solving Models with External Habit

  • Jessica A. Wachter

Habit utility has been the focus of a large and growing body of literature in financial economics. This study investigates ways of accurately and efficiently solving the Campbell and Cochrane (1999) external habit model. Solutions for this model based on a grid of values for the state variable are shown to converge as the grid becomes increasingly fine. Convergence is substantially faster if the price-dividend ratio is computed as a series of ``zero-coupon equity'' claims rather than as the fixed-point of the Euler equation. Fitting the model to the term structure as well as to equity moments (as in Wachter (2005)) also results in faster convergence.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w11559.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11559.

as
in new window

Length:
Date of creation: Aug 2005
Date of revision:
Publication status: published as Wachter, Jessica A. "Solving Models With External Habit," Finance Research Letters, 2005, v2(4,Dec), 210-226.
Handle: RePEc:nbr:nberwo:11559
Note: AP
Contact details of provider: Postal:
National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.

Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

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.:

as in new window
  1. Thomas Tallarini & Harold Zhang, . "External Habit and the Cyclicality of Expected Stock Returns," GSIA Working Papers 1997-26, Carnegie Mellon University, Tepper School of Business.
  2. Francisco J. Gomes & Alexander Michaelides, 2003. "Portfolio choice with internal habit formation : a life-cycle model with uninsurable labor income risk," LSE Research Online Documents on Economics 196, London School of Economics and Political Science, LSE Library.
  3. John Y. Campbell, 1986. "Bond and Stock Returns in a Simple Exchange Model," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 785-803.
  4. Andrew Ang & Jun Liu, 2003. "How to Discount Cashflows with Time-Varying Expected Returns," NBER Working Papers 10042, National Bureau of Economic Research, Inc.
  5. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
  6. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887 Elsevier.
  7. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers 6683, National Bureau of Economic Research, Inc.
  8. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption-based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
  9. Bekaert, Geert & Engstrom, Eric & Grenadier, Steve, 2004. "Stock and Bond Returns with Moody Investors," CEPR Discussion Papers 4501, C.E.P.R. Discussion Papers.
  10. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  11. Martin Lettau & Jessica Wachter, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium," NBER Working Papers 11144, National Bureau of Economic Research, Inc.
  12. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  13. Lettau, M. & Uhlig, H.F.H.V.S., 1995. "Can Habit Formation be Reconciled with Business Cycle Facts?," Discussion Paper 1995-54, Tilburg University, Center for Economic Research.
  14. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
  15. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  16. repec:dgr:kubcen:199554 is not listed on IDEAS
  17. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  18. Lubos Pástor & Pietro Veronesi, 2005. "Rational IPO Waves," Journal of Finance, American Finance Association, vol. 60(4), pages 1713-1757, 08.
  19. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  20. Wachter, Jessica A., 2006. "A consumption-based model of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 79(2), pages 365-399, February.
  21. Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1457-1498, October.
  22. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 1-47, February.
  23. Li, Yuming, 2001. "Expected Returns and Habit Persistence," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 861-99.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11559. 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 you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.