Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

Posted: 12 Jun 2012 Last revised: 7 Dec 2013

See all articles by Eduard Dubin

Eduard Dubin

Goethe University Frankfurt - Department of Finance

Olesya V. Grishchenko

Board of Governors of the Federal Reserve System

Vasily Kartashov

Goethe University Frankfurt

Multiple version iconThere are 4 versions of this paper

Date Written: December 6, 2013

Abstract

We explicitly solve for the aggregate asset prices in a general equilibrium Lucas endowment economy with two agents who are heterogeneous in their time-nonseparable preferences. Time-nonseparability is modeled either as internal or external habit preferences. Equilibrium quantities -- equity premium, equity return volatility, Sharpe ratio, interest rate, interest rate volatility, and asset holdings -- are computed via an algorithm of Dumas and Lyasoff (2012) modified for 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: asset pricing, 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

Dubin, Eduard and Grishchenko, Olesya V. and Kartashov, Vasily, Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing (December 6, 2013). Paris December 2012 Finance Meeting EUROFIDAI-AFFI Paper. Available at SSRN: https://ssrn.com/abstract=2081966 or http://dx.doi.org/10.2139/ssrn.2081966

Eduard Dubin

Goethe University Frankfurt - Department of Finance ( email )

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

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)

Vasily Kartashov

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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