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Testing Habits In An Asset Pricing Model

Author

Listed:
  • Melisso Boschi
  • Stefano d'Addona
  • Aditya Goenka

    () (Ministry of Economics and Finance (Italy), University of Roma Tre, National University of Singapore)

Abstract

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.

Suggested Citation

  • Melisso Boschi & Stefano d'Addona & Aditya Goenka, 2009. "Testing Habits In An Asset Pricing Model," Working Papers 0509, CREI Universit√† degli Studi Roma Tre, revised 2009.
  • Handle: RePEc:rcr:wpaper:05_09
    as

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    File URL: http://host.uniroma3.it/centri/crei/pubblicazioni/workingpapers2009/CREI_05_2009.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Braun, Phillip A. & Constantinides, George M. & Ferson, Wayne E., 1993. "Time nonseparability in aggregate consumption : International evidence," European Economic Review, Elsevier, vol. 37(5), pages 897-920, June.
    4. repec:acb:camaaa:2007-28 is not listed on IDEAS
    5. 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.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. M Boschi & S d'Addona & A Goenka, 2012. "Testing external habits in an asset pricing model," CAMA Working Papers 2012-20, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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