Testing Habits in an Asset Pricing Model

30 Pages Posted: 15 Mar 2010 Last revised: 12 May 2017

See all articles by Melisso Boschi

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA)

Stefano d'Addona

University of Roma Tre

Aditya Goenka

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 13, 2010

Abstract

We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markov-switching VAR model on the US postwar economy.

The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.

Keywords: Habit formation, Equity premium, Business cycles, Markov-switching VAR models

JEL Classification: E21, E32, E44, G11, G12

Suggested Citation

Boschi, Melisso and d'Addona, Stefano and Goenka, Aditya, Testing Habits in an Asset Pricing Model (March 13, 2010). Available at SSRN: https://ssrn.com/abstract=1570028 or http://dx.doi.org/10.2139/ssrn.1570028

Melisso Boschi

Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stefano D'Addona (Contact Author)

University of Roma Tre ( email )

Via Chiabrera, 199
Rome, 00145
Italy

Aditya Goenka

affiliation not provided to SSRN ( email )

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