IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2006cf429.html
   My bibliography  Save this paper

Asset Pricing With Multiplicative Habit and Power-Expo Preferences

Author

Listed:
  • William T. Smith

    (Department of Economics, Fogelman College of Business & Economics, University of Memphis)

  • Qiang Zhang

    (Department of Economics, Fogelman College of Business & Economics, University of Memphis)

Abstract

Multiplicative habit introduces an additional consumption risk as a determinant of equity premium, and allows time preference and habit strength, in addition to risk aversion, to affect "price of risk". A model combining multiplicative habit and power-expo preferences cannot be rejected.

Suggested Citation

  • William T. Smith & Qiang Zhang, 2006. "Asset Pricing With Multiplicative Habit and Power-Expo Preferences," CIRJE F-Series CIRJE-F-429, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2006cf429
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2006/2006cf429.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    2. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    3. Danyang Xie, 2000. "Power Risk Aversion Utility Functions," Annals of Economics and Finance, Society for AEF, vol. 1(2), pages 265-282, November.
    4. Meyer, Donald J. & Meyer, Jack, 2005. "Risk preferences in multi-period consumption models, the equity premium puzzle, and habit formation utility," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1497-1515, November.
    5. 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.
    6. Philippe Weil, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 29-42.
    7. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    8. Ogaki, Masao & Zhang, Qiang, 2001. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometrica, Econometric Society, vol. 69(2), pages 515-526, March.
    9. 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.
    10. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-286, April.
    11. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
    12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    13. Otrok, Christopher & Ravikumar, B. & Whiteman, Charles H., 2002. "Habit formation: a resolution of the equity premium puzzle?," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1261-1288, September.
    14. 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.
    15. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 3-33, February.
    16. 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.
    17. Atanu Saha, 1993. "Expo-Power Utility: A ‘Flexible’ Form for Absolute and Relative Risk Aversion," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(4), pages 905-913.
    18. 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 519-543, June.
    19. Zhang, Qiang, 2006. "Human Capital, Weak Identification, and Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 873-899, June.
    20. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-280, July.
    21. Qiang Zhang & Masao Ogaki, 2004. "Decreasing Relative Risk Aversion, Risk Sharing, and the Permanent Income Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 421-430, October.
    22. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dreyer, Johannes K. & Schneider, Johannes & Smith, William T., 2013. "Saving-based asset-pricing," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3704-3715.
    2. van Bilsen, Servaas & Linders, Daniël, 2019. "Affordable and adequate annuities with stable payouts: Fantasy or reality?," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 19-42.
    3. Natalia, Khorunzhina & Wayne Roy, Gayle, 2011. "Heterogenous intertemporal elasticity of substitution and relative risk aversion: estimation of optimal consumption choice with habit formation and measurement errors," MPRA Paper 34329, University Library of Munich, Germany.
    4. Giannikos, Christos I. & Koimisis, Georgios, 2021. "Habits, Wealth and Equity Risk Premium," Finance Research Letters, Elsevier, vol. 38(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. William T. Smith & Qiang Zhang, 2006. "Asset Pricing With Multiplicative Habit and Power-Expo Preferences (Subsequently published in "Economics Letters", 2007, 94(3), 319-325. )," CARF F-Series CARF-F-070, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Dreyer, Johannes K. & Schneider, Johannes & Smith, William T., 2013. "Saving-based asset-pricing," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3704-3715.
    3. 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.
    4. Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
    5. Grishchenko, Olesya V., 2010. "Internal vs. external habit formation: The relative importance for asset pricing," Journal of Economics and Business, Elsevier, vol. 62(3), pages 176-194, May.
    6. Longstaff, Francis A. & Piazzesi, Monika, 2004. "Corporate earnings and the equity premium," Journal of Financial Economics, Elsevier, vol. 74(3), pages 401-421, December.
    7. Jaime Alonso‐Carrera & Jordi Caballé & Xavier Raurich, 2004. "Consumption Externalities, Habit Formation and Equilibrium Efficiency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 231-251, June.
    8. Johdo, Wataru, 2009. "Habit persistence and stagnation," Economic Modelling, Elsevier, vol. 26(5), pages 1110-1114, September.
    9. Otrok, Christopher, 2001. "On measuring the welfare cost of business cycles," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 61-92, February.
    10. James C. Morley, 2007. "The Slow Adjustment of Aggregate Consumption to Permanent Income," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 615-638, March.
    11. Santiago Budría & Antonia Díaz, 2006. "Term and Equity Premium in Economies with Habit Formation," Working Papers 2006-23, FEDEA.
    12. Gómez Manuel A., 2010. "Endogenous Growth, Habit Formation and Convergence Speed," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-32, January.
    13. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
    14. Enrichetta Ravina, 2005. "Keeping Up with the Joneses: Evidence from Micro Data," 2005 Meeting Papers 557, Society for Economic Dynamics.
    15. Budria, Santiago & Díaz, Antonia, 2006. "Term premium and equity premium in economies with habit formation," UC3M Working papers. Economics we065522, Universidad Carlos III de Madrid. Departamento de Economía.
    16. Kim, Sei-Wan & Krausz, Joshua & Nam, Kiseok, 2013. "Revisiting asset pricing under habit formation in an overlapping-generations economy," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 132-138.
    17. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    18. Kihlstrom, Richard, 2009. "Risk aversion and the elasticity of substitution in general dynamic portfolio theory: Consistent planning by forward looking, expected utility maximizing investors," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 634-663, September.
    19. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
    20. Santiago Budría, 2008. "An Exploration of Asset Returns in a Production Economy with Relative Habits," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(3), pages 261-274, September.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2006cf429. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CIRJE administrative office (email available below). General contact details of provider: https://edirc.repec.org/data/ritokjp.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.