Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

39 Pages Posted: 22 Mar 2012

See all articles by Olesya V. Grishchenko

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System

Eduard Dubin

Goethe University Frankfurt - Department of Finance

Vasily Kartashov

Goethe University Frankfurt

Multiple version iconThere are 4 versions of this paper

Date Written: March 1, 2012

Abstract

We study the asset pricing implications of a general equilibrium Lucas endowment economy inhabited by two agents with habit formation preferences. Preferences are modeled either as internal or external habits. We allow for agents' heterogeneity in relative risk aversion and habit strength. We explicitly compute aggregate prices, such as equity premium, equity volatility, Sharpe ratio, interest rate volatility, and asset holdings for both types of preferences. Equilibrium quantities are computed using a recently developed algorithm of Dumas and Lyasoff (2011), which is refined to capture time nonseparability induced by habit. We obtain that internal habits provide for a considerable improvement in obtaining aggregate asset pricing quantities consistent with historically observed magnitudes as opposed to "catching up with Joneses" preferences.

Keywords: Consumption-based asset pricing models, external habit, internal habit, heterogeneity, time nonseparability, general equilibrium, recursive solution

JEL Classification: C68, D58, D91, E21, E44, G11, G12

Suggested Citation

Grishchenko, Olesya V. and Dubin, Eduard and Kartashov, Vasily, Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing (March 1, 2012). FEDS Working Paper No. 2012-07. Available at SSRN: https://ssrn.com/abstract=2027106 or http://dx.doi.org/10.2139/ssrn.2027106

Olesya V. Grishchenko (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2981 (Phone)

Eduard Dubin

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Grueneburgplatz 1
Frankfurt am Main, Hessen 60323
Germany

Vasily Kartashov

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
62
Abstract Views
558
rank
174,737
PlumX Metrics