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Asset Prices under Habit Formation and Catching up with the Joneses

Andrew Abel ()

No 3279, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States.

Date: 1990-03
Note: ME
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Published as The American Economic Review, Vol. 80, No. 2, pp. 38-42, (May 1990).

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Related works:
Working Paper: Asset prices under habit formation and catching up with the Jones (2010) Downloads
Journal Article: Asset Prices under Habit Formation and Catching Up with the Joneses (1990) Downloads
Working Paper: ASSET PRICES UNDER HABIT FORMATION AND CATCHING UP WITH THE JONESES (1990)
Working Paper: Asset Prices Under Habit Formation and Catching Up With the Jones
Working Paper: Asset Prices Under Habit Formation and Catching Up With the Jones
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