Can the seasonal pattern of consumption growth reproduce habits in the cross-section of stock returns? Evidence from the European equity market

Javier Rojo-Suárez, Ana Belén Alonso-Conde and Ricardo Ferrero-Pozo

The European Journal of Finance, 2021, vol. 27, issue 8, 721-739

Abstract: This paper examines the prevalence for Europe of some well-documented seasonal patterns in consumption data, which allow classic consumption-based asset pricing models to omit an explicit habit specification. We use the Campbell-Cochrane habit model as a reference, proxying habit persistence by the serial correlation of consumer sentiment. Our results show that consumption data for the third and fourth quarters allow the classic power utility function to perform very similarly to the Campbell-Cochrane model, while the serial correlation of consumer sentiment helps improve the explanatory power of habits.

Date: 2021
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DOI: 10.1080/1351847X.2020.1838936

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