Habit, Long Run Risks, Prospect? A Statistical Inquiry

Journal of Financial Econometrics, Forthcoming

39 Pages Posted: 30 Nov 2009 Last revised: 30 Nov 2010

See all articles by Eric M. Aldrich

Eric M. Aldrich

University of California, Santa Cruz

A. Ronald Gallant

Duke University - Fuqua School of Business, Economics Group; New York University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 29, 2010

Abstract

We use recently proposed Bayesian statistical methods to compare the habit persistence asset pricing model of Campbell and Cochrane, the long-run risks model of Bansal and Yaron, and the prospect theory model of Barberis, Huang, and Santos. We improve these Bayesian methods so that they can accommodate highly nonlinear models such as the three aforementioned. Our substantive results can be stated succinctly: If one believes that the extreme consumption fluctuations of 1930–1949 can recur, although they have not in the last sixty years even counting the current recession, then the long-run risks model is preferred. Otherwise, the habit model is preferred.

Keywords: Statistical Tests, Habit, Long-Run Risks, Prospect Theory, Asset Pricing

JEL Classification: E00, G12, C51, C52

Suggested Citation

Aldrich, Eric Mark and Gallant, A. Ronald, Habit, Long Run Risks, Prospect? A Statistical Inquiry (April 29, 2010). Journal of Financial Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1515692

Eric Mark Aldrich

University of California, Santa Cruz ( email )

Santa Cruz, CA 95064
United States
831-459-4247 (Phone)

HOME PAGE: http://ealdrich.com

A. Ronald Gallant (Contact Author)

Duke University - Fuqua School of Business, Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

New York University - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

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