Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

38 Pages Posted: 16 Sep 2012 Last revised: 15 Aug 2017

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: August 14, 2017

Abstract

We explicitly solve for the aggregate asset prices in a discrete-time general-equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to habit, either internal or external. We compute equilibrium quantities -- equity premium, equity return volatility, Sharpe ratio, interest rate, interest rate volatility, and asset holdings -- via a generalized algorithm of Dumas and Lyasoff (2012, JF). Generalization addresses time-nonseparability of utility function induced by habit. We find that internal habits produce equilibrium asset prices that are more consistent with historically observed aggregate prices relative to external-habit 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

Dubin, Eduard and Grishchenko, Olesya V. and Kartashov, Vasily, Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing (August 14, 2017). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2147017 or http://dx.doi.org/10.2139/ssrn.2147017

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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