An Iterated GMM Procedure for Estimating the Campbell-Cochrane Habit Formation Model, with an Application to Danish Stock and Bond Returns

International Journal of Finance and Economics, Vol. 15, No. 2, pp. 213-227, 2010

27 Pages Posted: 25 Jun 2008 Last revised: 14 May 2011

See all articles by Tom Engsted

Tom Engsted

University of Aarhus - CREATES

Stig Vinther Møller

Aarhus University - CREATES

Date Written: February 27, 2008

Abstract

We suggest an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane (1999), and we apply the approach on annual and quarterly Danish stock and bond returns. For comparative purposes we also estimate and test the standard CRRA model. In addition, we compare the pricing errors of the different models using Hansen and Jagannathan's (1997) specification error measure. The main result is that for Denmark the Campbell-Cochrane model does not seem to perform markedly better than the CRRA model. For the long annual sample period covering more than 80 years there is absolutely no evidence of superior performance of the Campbell-Cochrane model. For the shorter and more recent quarterly data over a 20-30 year period, there is some evidence of counter-cyclical time-variation in the degree of risk-aversion, in accordance with the Campbell-Cochrane model, but the model does not produce lower pricing errors or more plausible parameter estimates than the CRRA model.

Keywords: Consumption-based model, habit persistence, GMM, pricing error

JEL Classification: G12

Suggested Citation

Engsted, Tom and Møller, Stig Vinther, An Iterated GMM Procedure for Estimating the Campbell-Cochrane Habit Formation Model, with an Application to Danish Stock and Bond Returns (February 27, 2008). International Journal of Finance and Economics, Vol. 15, No. 2, pp. 213-227, 2010. Available at SSRN: https://ssrn.com/abstract=1148147

Tom Engsted (Contact Author)

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Stig Vinther Møller

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Register to save articles to
your library

Register

Paper statistics

Downloads
110
Abstract Views
644
rank
248,464
PlumX Metrics