An Empirical Investigation of the Campbell-Cochrane Habit Utility Model

18 Pages Posted: 13 Oct 2009

See all articles by Edward R. Lawrence

Edward R. Lawrence

Florida International University (FIU) - Department of Finance

John M. Geppert

University of Nebraska at Lincoln - Department of Finance

Arun J. Prakash

affiliation not provided to SSRN

Date Written: 2009-01

Abstract

This paper tests whether the Campbell and Cochrane (1999) habit utility model generates a valid stochastic discount factor for the 25 Fama-French size/book-to-market and size/momentum sorted portfolios. Campbell and Cochrane (1999) derive a consumption based habit utility asset pricing model and calibrate it to aggregate US stock market data. However, they do not test whether their model is consistent with a larger cross section of asset returns. We test their model using the methodology of Hansen and Jagannathan (1991) and Burnside (1994). In contrast to previous studies, we find that for reasonable parameter values, the model's stochastic discount factor is inside the Hansen-Jagannathan bounds and therefore satisfies the necessary conditions for a valid stochastic discount factor. We trace the difference between our results and previous studies to the method used to estimate the model's parameters and the parameter values themselves.

Suggested Citation

Lawrence, Edward R. and Geppert, John M. and Prakash, Arun J., An Empirical Investigation of the Campbell-Cochrane Habit Utility Model (2009-01). Journal of Business Finance & Accounting, Vol. 36, Issue 5-6, pp. 774-791, June/July 2009, Available at SSRN: https://ssrn.com/abstract=1486369 or http://dx.doi.org/10.1111/j.1468-5957.2009.02134.x

Edward R. Lawrence (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

John M. Geppert

University of Nebraska at Lincoln - Department of Finance ( email )

229 CBA
Lincoln, NE 68588-0490
United States
(402) 472-3370 (Phone)

Arun J. Prakash

affiliation not provided to SSRN ( email )

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