publication . Preprint . 2004

Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Behavior

Xiaohong Chen; Sydney C. Ludvigson;
Open Access
  • Published: 01 May 2004
Abstract
This paper studies the ability of a general class of habit-based asset pricing models to match the conditional moment restrictions implied by asset pricing theory. We treat the functional form of the habit as unknown, and to estimate it along with the rest of the model's finite dimensional parameters. Using quarterly data on consumption growth, assets returns and instruments, our empirical results indicate that the estimated habit function is nonlinear, the habit formation is better described as internal rather than external, and the estimated time-preference parameter and the power utility parameter are sensible. In addition, the estimated habit function genera...
Subjects
free text keywords: jel:G1
59 references, page 1 of 4

Ai, C., and X. Chen (2003): “E¢ cient Estimation of Models with Conditional Moment Restrictions Containing Unknown Functions,” Econometrica, 71, 1795–1843.

Bansal, R., D. A. Hsieh, and S. Viswanathan (1993): “A New Approach to International Arbitrage Pricing,” The Journal of Finance, 48, 1719–1747.

Bansal, R., and S. Viswanathan (1993): “No Arbitrage and Arbitrage Pricing: A New Approach,”The Journal of Finance, 48(4), 1231–1262. [OpenAIRE]

Boldrin, M., L. J. Christiano, and J. D. M. Fisher (2001): “Habit Persistence, Asset Returns and the Business Cycle,” American Economic Review, 91(1), 149–166. [OpenAIRE]

Breeden, D. (1979): “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities,” Journal of Financial Economics, 7, 265–296.

Breeden, D., and R. Litzenberger (1978): “Prices of State-Contingent Claims Implicit in Option Prices,” Journal of Business, 51, 621–651. [OpenAIRE]

Campbell, J. Y. (1991): “A Variance Decomposition for Stock Returns,”Economic Journal, 101, 157–179. [OpenAIRE]

Campbell, J. Y., and J. H. Cochrane (1999): “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy, 107, 205–251. [OpenAIRE]

(2000): “Explaining the Poor Performance of Consumption-Based Asset Pricing Models,” Journal of Finance, 55(6), 2863–2878.

Campbell, J. Y., A. W. Lo, and C. MacKinlay (1997): The Econometrics of Financial Markets. Princeton University Press, Princeton, NJ.

Campbell, J. Y., and R. J. Shiller (1989): “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,” Review of Financial Studies, 1(3), 195–228.

Carrasco, M., and X. Chen (2002): “Mixing and Moment Properties of Various GARCH and Stochastic Volatility Models,” Economic Theory, 18, 17–39.

Chapman, D. A. (1997): “Approximating the Asset Pricing Kernel,”Journal of Finance, 52(4), 1383–1410.

(1998): “Habit Formation and Aggregate Consumption,” Econometrica, 66(5), 1223–1230.

Chen, X., L. P. Hansen, and M. Carrasco (2001): “Nonlinearity and Temporal Dependence,”Unpublished paper, New York University.

59 references, page 1 of 4
Abstract
This paper studies the ability of a general class of habit-based asset pricing models to match the conditional moment restrictions implied by asset pricing theory. We treat the functional form of the habit as unknown, and to estimate it along with the rest of the model's finite dimensional parameters. Using quarterly data on consumption growth, assets returns and instruments, our empirical results indicate that the estimated habit function is nonlinear, the habit formation is better described as internal rather than external, and the estimated time-preference parameter and the power utility parameter are sensible. In addition, the estimated habit function genera...
Subjects
free text keywords: jel:G1
59 references, page 1 of 4

Ai, C., and X. Chen (2003): “E¢ cient Estimation of Models with Conditional Moment Restrictions Containing Unknown Functions,” Econometrica, 71, 1795–1843.

Bansal, R., D. A. Hsieh, and S. Viswanathan (1993): “A New Approach to International Arbitrage Pricing,” The Journal of Finance, 48, 1719–1747.

Bansal, R., and S. Viswanathan (1993): “No Arbitrage and Arbitrage Pricing: A New Approach,”The Journal of Finance, 48(4), 1231–1262. [OpenAIRE]

Boldrin, M., L. J. Christiano, and J. D. M. Fisher (2001): “Habit Persistence, Asset Returns and the Business Cycle,” American Economic Review, 91(1), 149–166. [OpenAIRE]

Breeden, D. (1979): “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities,” Journal of Financial Economics, 7, 265–296.

Breeden, D., and R. Litzenberger (1978): “Prices of State-Contingent Claims Implicit in Option Prices,” Journal of Business, 51, 621–651. [OpenAIRE]

Campbell, J. Y. (1991): “A Variance Decomposition for Stock Returns,”Economic Journal, 101, 157–179. [OpenAIRE]

Campbell, J. Y., and J. H. Cochrane (1999): “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,” Journal of Political Economy, 107, 205–251. [OpenAIRE]

(2000): “Explaining the Poor Performance of Consumption-Based Asset Pricing Models,” Journal of Finance, 55(6), 2863–2878.

Campbell, J. Y., A. W. Lo, and C. MacKinlay (1997): The Econometrics of Financial Markets. Princeton University Press, Princeton, NJ.

Campbell, J. Y., and R. J. Shiller (1989): “The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,” Review of Financial Studies, 1(3), 195–228.

Carrasco, M., and X. Chen (2002): “Mixing and Moment Properties of Various GARCH and Stochastic Volatility Models,” Economic Theory, 18, 17–39.

Chapman, D. A. (1997): “Approximating the Asset Pricing Kernel,”Journal of Finance, 52(4), 1383–1410.

(1998): “Habit Formation and Aggregate Consumption,” Econometrica, 66(5), 1223–1230.

Chen, X., L. P. Hansen, and M. Carrasco (2001): “Nonlinearity and Temporal Dependence,”Unpublished paper, New York University.

59 references, page 1 of 4
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