publication . Preprint . Article . 2014

Habit, Production, and the Cross-Section of Stock Returns

Andrew Y. Chen;
Open Access
  • Published: 21 Nov 2014
Abstract
Solutions to the equity premium puzzle should inform us about the cross-section of stock returns. An external habit model with heterogeneous firms reproduces numerous stylized facts about both the equity premium and the value premium. The equity premium is large, time-varying, and linked with consumption volatility. The cross-section of expected returns is log-linear in B/M, and the slope matches the data. The explanation for the value premium lies in the interaction between the cross-section of cash flows and the time-varying risk premium. Value firms are temporarily low productivity firms, which will eventually experience high cash flows. The present value of ...
Subjects
free text keywords: Equity premium puzzle; value premium; production; time-varying consumption volatility, Financial economics, Econometrics, Economics, Liquidity premium, Present value, Volatility risk premium, Cash flow, Equity premium puzzle, Equity risk, Value premium, Risk premium
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