The role of external habits and preference heterogeneity in the equity term structure

Hamilton Galindo Gil

Journal of Economic Dynamics and Control, 2025, vol. 178, issue C

Abstract: We investigate the role of habit formation in consumption and risk-aversion heterogeneity in determining the slope and volatility of the equity term structure. Our model generates a procyclical conditional slope and an unconditionally downward-sloping volatility of equity yields, both of which are consistent with empirical evidence. Using predictive regressions, we show that leverage—an observable proxy for risk-aversion heterogeneity—and a measure of habit consumption have significant predictive power for both the slope and volatility of the equity term structure. These findings highlight the importance of risk-aversion heterogeneity and habit formation in shaping the equity term structure and underscore their value as predictors of its dynamics.

Keywords: Heterogeneous agents; External habit consumption; Equity term structure; Equity yields (search for similar items in EconPapers)
JEL-codes: C63 G11 G12 G51 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:178:y:2025:i:c:s016518892500123x

DOI: 10.1016/j.jedc.2025.105157

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