Habit-based asset pricing with limited participation consumption

Christian Bach and Stig V. Møller

Journal of Banking & Finance, 2011, vol. 35, issue 11, 2891-2901

Abstract: We calibrate and estimate a consumption-based asset pricing model with habit formation using limited participation consumption data. Based on survey data of a representative sample of American households, we distinguish between assetholder and non-assetholder consumption, as well as the standard aggregate consumption series commonly used in the CCAPM literature. We show that assetholder consumption outperforms non-assetholder and aggregate consumption data in explaining bond returns, bond yields, and the volatility of bond yields. We further show that the high volatility of assetholder consumption enables the model to explain the equity premium puzzle and the risk-free rate puzzle simultaneously for a reasonable value of relative risk aversion.

Keywords: CCAPM; Limited; participation; consumption; data; Habit; formation; Real; term; structure; Risk; premium; GMM; estimation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Working Paper: Habit-based Asset Pricing with Limited Participation Consumption (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:11:p:2891-2901

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