Revisiting asset pricing under habit formation in an overlapping-generations economy
Joshua Krausz and
Journal of Banking & Finance, 2013, vol. 37, issue 1, 132-138
By incorporating habit formation into an overlapping-generations economy, we show that the middle-aged consumers’ savings decision has a substantial impact on the equity premium. The higher incentive for savings for the middle-aged, resulting from the habit formation preference, causes an even higher demand for bonds and a lower demand for equity, which eventually generates a lower risk-free rate and a higher required return for holding equity than does the framework of non-habit forming models. Calibration results verify that the habit formation setting, together with an OLG framework is capable of yielding lower bond returns and higher equity returns than the standard CRRA utility models, and the borrowing constraint imposed on the young-aged consumers amplifies the positive effect of habit formation on the equity premium. The findings imply that habit formation preferences within the overlapping-generations framework under the borrowing-constrained economy can provide a more improved explanation of the equity premium puzzle.
Keywords: Equity premium; Habit formation preference; Overlapping-generations economies; Consumption asset pricing model; Calibration (search for similar items in EconPapers)
JEL-codes: E21 E27 G12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:1:p:132-138
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().