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

Wessel Marquering and Marno Verbeek

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

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 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 the asset pricing model with transaction costs and habit persistence does explain the cross-sectional variation in the portfolio returns quite accurately.

Date: 1998-03
New Economics Papers: this item is included in nep-cba and nep-dge
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Related works:
Journal Article: An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence (1999)
Working Paper: An Empirical Analysis of Intertemporal Asset Pricing Models with Transaction Costs and Habit Persistence (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:ces9824

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