Endogenous Habits and Equilibrium Asset Prices

49 Pages Posted: 8 Jul 2021 Last revised: 27 Dec 2021

See all articles by Holger Kraft

Holger Kraft

Goethe University Frankfurt

André Meyer-Wehmann

Goethe University Frankfurt

Frank Thomas Seifried

University of Trier

Date Written: December 22, 2021

Abstract

We study a two-agent equilibrium model with two goods where we interpret the agents as countries. We analyze the effect of an endogenous habit specification where each country benchmarks its consumption decision against the decision of the other country. We show that endogenous habits can generate high equity premia and low interest rates. Our framework allows to study setups where agents cooperate or do not cooperate. The optimality conditions of the non-cooperative setting are similar to models that consider agents with exogenous habit levels. Although the size of the equity premia and the risk-free rate are of the same order of magnitude in both settings, the consumption allocations are more even in the cooperative situation.

Keywords: general equilibrium, asset pricing, social preferences, dynamic game

JEL Classification: C71, C72, G10, G12, F31

Suggested Citation

Kraft, Holger and Meyer-Wehmann, André and Seifried, Frank Thomas, Endogenous Habits and Equilibrium Asset Prices (December 22, 2021). Available at SSRN: https://ssrn.com/abstract=3878691 or http://dx.doi.org/10.2139/ssrn.3878691

Holger Kraft (Contact Author)

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

André Meyer-Wehmann

Goethe University Frankfurt

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Frank Thomas Seifried

University of Trier ( email )

Department IV - Mathematics
Universitätsring 19
Trier, 54296
Germany

HOME PAGE: http://sites.google.com/site/seifriedfinance/

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