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TESTING HABITS IN AN ASSET PRICING MODEL

Melisso Boschi (), Stefano d'Addona () and Aditya Goenka ()

No 509, Working Papers from CREI Università degli Studi Roma Tre

Abstract: We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on the US postwar economy. The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.

Keywords: Habit formation; Equity premium; Business cycle; Markovswitching VAR models (search for similar items in EconPapers)
Date: 2009, Revised 2009
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Related works:
Working Paper: Testing external habits in an asset pricing model (2012) Downloads
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