Download This PaperProduction-Based Asset Pricing with Lumpy Investment: A Novel Sensitivity Function of External Habit
52 Pages Posted: 8 May 2020 Last revised: 19 Oct 2024
Date Written: April 19, 2020
Abstract
A general equilibrium model featuring a novel habit sensitivity function and nonconvex adjustment costs provides a unified explanation for aggregate and cross-sectional asset prices and investment rates through sizable volatility in marginal utility. The renaissance of negative values of habit into Campbell-Cochrane preferences is essential to generate this volatile marginal utility. An effective risk aversion close to 1, supported by the most common estimate in the Generalized Method of Moments, replicates equity premiums variability while retaining macroeconomic aggregates. An extension of the projection and perturbation algorithm offers computational advantages for cross-sectional expected returns in the presence of aggregate risks.
Keywords: Habit Sensitivity, Lumpy Investment, Production-Based Asset Pricing
JEL Classification: E22, E3, G1
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