An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish stock and bond returns

Tom Engsted and Stig V. Møller ()
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Stig V. Møller: School of Economics and Management, University of Aarhus, Denmark and CREATES, Postal: 8000 Aarhus C, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We suggest an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane (1999), and we apply the approach on annual and quarterly Danish stock and bond returns. For comparative purposes we also estimate and test the standard CRRA model. In addition, we compare the pricing errors of the different models using Hansen and Jagannathan’s (1997) specification error measure. The main result is that for Denmark the Campbell-Cochrane model does not seem to perform markedly better than the CRRA model. For the long annual sample period covering more than 80 years there is absolutely no evidence of superior performance of the Campbell-Cochrane model. For the shorter and more recent quarterly data over a 20-30 year period, there is some evidence of counter-cyclical time-variation in the degree of risk-aversion, in accordance with the Campbell-Cochrane model, but the model does not produce lower pricing errors or more plausible parameter estimates than the CRRA model.

Keywords: Consumption-based model; habit persistence; GMM; pricing error (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 27
Date: 2008-02-27
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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Journal Article: An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish Stock and bond returns (2010)
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