An Exploration of Asset Returns in a Production Economy with Relative Habits

Santiago Budria
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Santiago Budria: University of Madeira & CEEAplA
Authors registered in the RePEc Author Service: Santiago Budria ()

Finance from EconWPA

Abstract: This paper explores asset returns in a production economy with habit forming households. I show that a model with capital adjustment costs and relative habits is consistent with salient financial facts, such as the equity premium, the market price of risk, and the riskfree interest rate. These predictions are not at odds with good business cycle predictions. In the model economy investment is strongly procyclical and more volatile than output, which in turn is more volatile than consumption. Moreover, consumption growth is positively autocorrelated and negatively (positively) correlated with future (past) stock returns.

Keywords: Equity premium; Business cycles; Habit persistence. (search for similar items in EconPapers)
JEL-codes: G12 E22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-mac and nep-rmg
Date: 2005-05-03
Note: Type of Document - pdf; pages: 30

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http://129.3.20.41/eps/fin/papers/0505/0505004.pdf (application/pdf)

Related works:
Journal Article: An Exploration of Asset Returns in a Production Economy with Relative Habits (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0505004

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