Consumption Habit and International Stock Returns

EFA 2002 Berlin Meetings Presented Paper

33 Pages Posted: 19 Aug 2004

See all articles by Yuming Li

Yuming Li

California State University

Maosen Zhong

University of Queensland - Business School

Date Written: January 14, 2004

Abstract

We use the consumption-based asset pricing model with habit formation to study the predictability and cross section of returns from the international equity markets. We find that the predictability of returns from many developed countries' equity markets is explained in part by changing prices of risks associated with consumption relative to habit at the world as well as local levels. We also provide an exploratory investigation of the cross-sectional implications of the model under the complete world market integration hypothesis and find that the model performs mildly better than the traditional consumption-based model, the unconditional and conditional world CAPMs and a three-factor international asset pricing model.

Keywords: Consumption-based CAPM, habit formation, international asset pricing

JEL Classification: G15, G12

Suggested Citation

Li, Yuming and Zhong, Maosen, Consumption Habit and International Stock Returns (January 14, 2004). EFA 2002 Berlin Meetings Presented Paper, Available at SSRN: https://ssrn.com/abstract=302942 or http://dx.doi.org/10.2139/ssrn.302942

Yuming Li (Contact Author)

California State University ( email )

School of Business Box 6848
Fullerton, CA 92834-9480
United States
714-278-2217 (Phone)
714-278-2161 (Fax)

Maosen Zhong

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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