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Asset Prices Under Habit Formation and Reference-Dependent Preferences

43 Pages Posted: 16 Apr 2006 Last revised: 17 Jun 2009

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: May 7, 2007


This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stocks. The model's conditional moment restrictions are tested on consumption and asset returns data. The empirical estimate of large-scale risk aversion is low, whereas the estimate of loss aversion agrees with prior experimental evidence.

Keywords: Asset pricing, Consumption, Equity premium, Habit formation, Loss aversion

JEL Classification: E21, G12

Suggested Citation

Yogo, Motohiro, Asset Prices Under Habit Formation and Reference-Dependent Preferences (May 7, 2007). Journal of Business and Economic Statistics, Vol. 26, No. 2, 2008. Available at SSRN:

Motohiro Yogo (Contact Author)

Princeton University - Department of Economics ( email )

Julis Romo Rabinowitz Building
Princeton, NJ 08544
United States


National Bureau of Economic Research

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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