Consumption Habit and Equity Premium in the G7 Countries

Olivier Allais (), Loic Cadiou and Stephane Dees ()

Working Papers from CEPII research center

Abstract: The consumption capital asset pricing model (C-CAPM) fails to explain the observed equity premia apart from considering implausible values of the risk aversion coefficient. This equity premium puzzle has been attributed in particular to the time-separability of the consumers' preferences. This paper investigates empirically the ability of the C-CAPM to solve this puzzle once assumed that consumption behaviour presents habit formation. From the estimation of the model's parameters for the G7 countries, we show that the consumption model with habit formation is able to account for financial asset returns with more reasonable preference.

Keywords: Consumption; habit formation; equity premium; Generalized method of moments (search for similar items in EconPapers)
JEL-codes: C13 E21 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2000-12
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Persistent link: http://EconPapers.repec.org/RePEc:cii:cepidt:2000-19

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