External habit: Anything goes

Walt Pohl ()

Economics Letters, 2016, vol. 146, issue C, 140-142

Abstract: This paper explores the expressive ability of the external habit mechanism. I show that whenever the stochastic discount factor (SDF) is a function of aggregate consumption, there exists a representative agent external habit model that replicates that SDF. I also show that within this framework the other utility function parameters become indeterminate, in that a different choice of power utility can lead to the exact same SDF. The indeterminacy arises from an ambiguity in the SDF between the externality and individual consumption.

Keywords: External habit; Consumption-based asset pricing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:146:y:2016:i:c:p:140-142

DOI: 10.1016/j.econlet.2016.07.019

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