Loss aversion, habit formation and the term structures of equity and interest rates

Giuliano Curatola

Journal of Economic Dynamics and Control, 2015, vol. 53, issue C, 103-122

Abstract: I propose a consumption-based asset pricing model that jointly explains the high equity premium, the counter-cyclical behaviour of stock returns, the upward-sloping term structure of interest rates and the downward-sloping term structure of equity. The driving forces behind these results are loss aversion and time-varying habits. The high premium is the reward for holding assets that deliver low returns when consumption descends below habits. The term structure of interests rates is upward-sloping because long-term bonds are more sensitive to fluctuations of discount rates. The term structure of equity is downward-sloping because long-horizon equity gives higher chances to beat consumption habits than short-horizon equity.

Keywords: Loss-aversion; Habit formation; Yield curve; Dividend strips; General equilibrium (search for similar items in EconPapers)
JEL-codes: D51 D91 E20 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188915000287
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:53:y:2015:i:c:p:103-122

DOI: 10.1016/j.jedc.2015.02.009

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().