Testing Habits In An Asset Pricing Model
We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on the US postwar economy. The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.
|Date of creation:||2009|
|Date of revision:||2009|
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- Boschi, Melisso & Goenka, Aditya, 2012.
"Relative risk aversion and the transmission of financial crises,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 36(1), pages 85-99.
- Melisso Boschi & Aditya Goenka, 2007. "Relative Risk Aversion And The Transmission Of Financial Crises," CAMA Working Papers 2007-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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- Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2003. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Economics Letters, Elsevier, vol. 78(3), pages 295-299, March.
- Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2001. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Research Discussion Papers 11/2001, Bank of Finland.
- 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.
- 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.
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