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Good-Specifc Habit Formation and the Cross Section of Expected Returns


Jules H. Van Binsbergen


University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

December 1, 2007

EFA 2008 Athens Meetings Paper
AFA 2009 San Francisco Meetings Paper

Abstract:     
I study the cross-section of expected stock returns in a general equilibrium framework where agents form habits over individual varieties of goods. Goods are produced by monopolistically competitive firms whose income and price elasticities of demand depend on the habit formation of the consumers. Firms that produce goods with a high habit level relative to consumption have low income and price elasticities, set high prices for their product, and have low expected returns on their stock. Taking this prediction to the data, I find a return spread that is hard to explain by commonly used empirical asset pricing models.

Number of Pages in PDF File: 53

Keywords: Habit formation, Cross Section, Expected Returns, Markups

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Date posted: March 22, 2008 ; Last revised: September 15, 2013

Suggested Citation

van Binsbergen, Jules H., Good-Specifc Habit Formation and the Cross Section of Expected Returns (December 1, 2007). EFA 2008 Athens Meetings Paper; AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1101456 or http://dx.doi.org/10.2139/ssrn.1101456

Contact Information

Jules H. Van Binsbergen (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen
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