An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence

Posted: 4 Jan 2006

See all articles by Wessel Marquering

Wessel Marquering

Erasmus University Rotterdam (EUR) - Department of Financial Management

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Abstract

In intertemporal asset pricing models, transaction costs are usually neglected. In this paper we explicitly incorporate transaction costs in these models and analyze to what extent this extension is helpful in explaining the cross-section of expected returns. An empirical analysis using CRSP data on size-based portfolios examines the role of the transaction costs and shows that incorporating such costs in the consumption-based model with power utility does not yield very satisfactory results. However, the introduction of habit persistence substantially improves the model. We find rather strong evidence of habit persistence in monthly consumption data. The plots of the models' pricing errors indicate that an intertemporal asset pricing model with transaction costs and habit persistence explains the cross-sectional variation in the portfolio returns quite accurately.

Keywords: Intertemporal asset pricing, transaction costs, habit persistence, pricing errors

JEL Classification: G12, C13, C52

Suggested Citation

Marquering, Wessel A. and Verbeek, Marno, An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence. Journal of Empirical Finance, Vol. 6, pp. 243-265, September 1999 , Available at SSRN: https://ssrn.com/abstract=873517

Wessel A. Marquering

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
F4-26
Rotterdam 3000 DR
Netherlands
+31 10 408 2786 (Phone)
+31 10 408 9017 (Fax)

Marno Verbeek (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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