publication . Article . 2002

Does Intrinsic Habit Formation Actually Resolve the Equity Premium Puzzle?

David A. Chapman;
Open Access
  • Published: 01 Jan 2002 Journal: Review of Economic Dynamics, volume 5, issue 3 July, pages 618-645
Constantinides (1990) describes a simple model of intrinsic habit formation that appears to resolve the "equity premium puzzle" of Mehra and Prescott (1985). This finding is particularly important, since it has motivated a broader consideration of the implications of habit formation preferences in dynamic equilibrium models. However, consumption growth actually behaves very differently pre- and post-1948, and the explanatory power of the habit formation model is driven by the pre-1948 data. Using data from 1949 to 2000, constructed in a manner comparable to Mehra and Prescott (1985), I demonstrate that intrinsic habit cannot rationalize the unconditional moments...
free text keywords: jel:E21, jel:G12, Economics and Econometrics, Macroeconomics, Equity premium puzzle, Asset return, Risk aversion, Explanatory power, Microeconomics, Instrumental and intrinsic value, Economics, Habit, media_common.quotation_subject, media_common
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