Consumption Habit and International Stock Returns
EFA 2002 Berlin Meetings Presented Paper
33 Pages Posted: 19 Aug 2004
Date Written: January 14, 2004
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: Suggested Citation