Abstract

http://ssrn.com/abstract=294069
 
 

Citations (10)



 
 

Footnotes (28)



 


 



Habit Formation and the Cross Section of Stock Returns


Lior Menzly


University of Chicago - Booth School of Business

Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Tano Santos


Columbia Business School; National Bureau of Economic Research (NBER)

December 12, 2001

CRSP Working Paper No. 534

Abstract:     
We develop an external habit persistence model where the time series of the aggregate portfolio and the cross section of stock returns are simultaneously studied and tested. By applying a slightly modified version of the model of Campbell and Cochrane (1999), we obtain closed form solutions for individual securities prices and returns and a full characterizations of the dynamics of the risk-return characteristics of individual securities. We find that each stock return "beta" with respect to the total wealth portfolios is jointly determined by an aggregate variable that depends on the habit level, and an idiosyncratic asset characteristics that depends on the contribution of the security to total consumption relative to its long-run average contribution. This functional form imposes tight predictions on the cross sectional test, including sign and magnitude of the coefficients, and insures that the explanatory power of the beta comes from the predictable part of the realization of returns. An estimate of the model for a set of 20 industry portfolios is able to explain cross-sectional variation in the conditional expected returns. Moreover, the model generates price consumption ratios for individual industries that track well the empirical ones.

Number of Pages in PDF File: 74

working papers series





Download This Paper

Date posted: December 15, 2001  

Suggested Citation

Menzly, Lior and Veronesi, Pietro and Santos, Tano, Habit Formation and the Cross Section of Stock Returns (December 12, 2001). CRSP Working Paper No. 534. Available at SSRN: http://ssrn.com/abstract=294069 or http://dx.doi.org/10.2139/ssrn.294069

Contact Information

Lior Menzly
University of Chicago - Booth School of Business ( email )
1101 East 58th Street
c/o PhD Office
Chicago, IL 60637
United States
(773) 702-7420 (Phone)
(773) 702-5257 (Fax)
Pietro Veronesi (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Tano Santos
Columbia Business School ( email )
420 West 118th Street
New York, NY 10027
United States
212-854-0489 (Phone)
212-316-9180 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 1,581
Downloads: 339
Download Rank: 50,183
Citations:  10
Footnotes:  28

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.344 seconds