Abstract

http://ssrn.com/abstract=686027
 
 

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Asset Prices Under Habit Formation and Reference-Dependent Preferences


Motohiro Yogo


Federal Reserve Bank of Minneapolis

May 7, 2007

Journal of Business and Economic Statistics, Vol. 26, No. 2, 2008

Abstract:     
This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stocks. The model's conditional moment restrictions are tested on consumption and asset returns data. The empirical estimate of large-scale risk aversion is low, whereas the estimate of loss aversion agrees with prior experimental evidence.

Number of Pages in PDF File: 43

Keywords: Asset pricing, Consumption, Equity premium, Habit formation, Loss aversion

JEL Classification: E21, G12

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Date posted: April 16, 2006 ; Last revised: June 17, 2009

Suggested Citation

Yogo, Motohiro, Asset Prices Under Habit Formation and Reference-Dependent Preferences (May 7, 2007). Journal of Business and Economic Statistics, Vol. 26, No. 2, 2008. Available at SSRN: http://ssrn.com/abstract=686027

Contact Information

Motohiro Yogo (Contact Author)
Federal Reserve Bank of Minneapolis ( email )
90 Hennepin Avenue
Minneapolis, MN 55401-1804
United States
HOME PAGE: http://https://sites.google.com/site/motohiroyogo/
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