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The Time Series of the Cross Section of Asset Prices

  • Lior Menzly
  • Tano Santos
  • Pietro Veronesi
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    In this paper we propose a general equilibrium model that successfully reproduces the historical experience of the cross section of US stock prices as well as the realized history of the market portfolio. The model achieves this while addressing traditional concerns in the asset pricing literature: A high equity premium and volatility of returns, the long horizon predictability, and a low volatility of the risk free rate. The model combines a rich payoff structure with a habit persistence discount factor, which allows us to identify the effect on prices of idiosyncratic cash flow shocks versus business cycle components.

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    File URL: http://www.nber.org/papers/w9217.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9217.

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    Date of creation: Sep 2002
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    Handle: RePEc:nbr:nberwo:9217
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    1. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
    2. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers 1-90, Wharton School Rodney L. White Center for Financial Research.
    3. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
    4. Boudoukh, Jacob & Richardson, Matthew & Whitelaw, Robert F, 1994. " Industry Returns and the Fisher Effect," Journal of Finance, American Finance Association, vol. 49(5), pages 1595-1615, December.
    5. Tobias J. Moskowitz & Mark Grinblatt, . "Do Industries Explain Momentum?," CRSP working papers 480, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    6. 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.
    7. 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.
    8. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
    9. Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000. "Habit persistence, asset returns and the business cycle," Staff Report 280, Federal Reserve Bank of Minneapolis.
    10. Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
    11. Jody Overland & Christopher D. Carroll & David N. Weil, 2000. "Saving and Growth with Habit Formation," American Economic Review, American Economic Association, vol. 90(3), pages 341-355, June.
    12. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    13. repec:dgr:kubcen:199554 is not listed on IDEAS
    14. 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.
    15. Tano Santos & Pietro Veronesi, 2001. "Labor Income and Predictable Stock Returns," NBER Working Papers 8309, National Bureau of Economic Research, Inc.
    16. Detemple, Jerome B & Zapatero, Fernando, 1991. "Asset Prices in an Exchange Economy with Habit Formation," Econometrica, Econometric Society, vol. 59(6), pages 1633-57, November.
    17. David A. Chapman, 1998. "Habit Formation and Aggregate Consumption," Econometrica, Econometric Society, vol. 66(5), pages 1223-1230, September.
    18. Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, 02.
    19. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, vol. 61(2), pages 353-85, March.
    20. Heien, Dale & Durham, Cathy, 1991. "A Test of the Habit Formation Hypothesis Using Household Data," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 189-99, May.
    21. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, june. pag.
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