Download or read book Habit Formation and Recursive Intertemporal Preference in Asset Pricing written by Eric Campbell Full Yet Lam and published by . This book was released on 2004 with total page 302 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Revealed Preference Analysis of Asset Pricing Under Recursive Utility written by Larry G. Epstein and published by . This book was released on 1993 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper considers a representative agent model of asset prices based on a recursive utility specification. A constant elasticity of intertemporal substitution is assumed but the risk-preference component of utility is restricted only by qualitative, nonparametric regularity conditions. The principal contribution is to determine the exhaustive implications of this semiparametric recursive utility model for the one-step ahead joint probability distribution for consumption growth and asset returns

Download or read book Intertemporal Asset Pricing written by Bernd Meyer and published by Springer Science & Business Media. This book was released on 2012-12-06 with total page 295 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the mid-eighties Mehra and Prescott showed that the risk premium earned by American stocks cannot reasonably be explained by conventional capital market models. Using time additive utility, the observed risk pre mium can only be explained by unrealistically high risk aversion parameters. This phenomenon is well known as the equity premium puzzle. Shortly aft erwards it was also observed that the risk-free rate is too low relative to the observed risk premium. This essay is the first one to analyze these puzzles in the German capital market. It starts with a thorough discussion of the available theoretical mod els and then goes on to perform various empirical studies on the German capital market. After discussing natural properties of the pricing kernel by which future cash flows are translated into securities prices, various multi period equilibrium models are investigated for their implied pricing kernels. The starting point is a representative investor who optimizes his invest ment and consumption policy over time. One important implication of time additive utility is the identity of relative risk aversion and the inverse in tertemporal elasticity of substitution. Since this identity is at odds with reality, the essay goes on to discuss recursive preferences which violate the expected utility principle but allow to separate relative risk aversion and intertemporal elasticity of substitution.

Download or read book A Revealed Preference Analysis of Asset Pricing Under Recursive Utility written by Larry G. Epstein and published by . This book was released on 2006 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper considers a representative agent model of asset prices based on a recursive utility specification. A constant elasticity of intertemporal substitution is assumed but the risk-preference component of utility is restricted only by qualitative, nonparametric regularity conditions. The principal contribution is to determine the exhaustive implications of this semiparametric recursive utility model for the one-step ahead joint probability distribution for consumption growth and asset returns.

Download or read book Portfolio Choice with Internal Habit Formation written by Francisco Gomes and published by . This book was released on 2008 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: A low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.

Download or read book An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications written by John Heaton and published by . This book was released on 1991 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Internal vs External Habit Formation written by Olesya V. Grishchenko and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present a generalized model that structurally nests both quot;catching up with the Jonesesquot; (external habit) and quot;time non-separablequot; (internal habit) preference specifications. The model's asset pricing implications are confronted with the observed aggregate US consumption and asset returns data to determine the relative importance of quot;catching up with the Jonesesquot; and internal habit formation. I show that long-horizon aggregate returns are more consistent with long-run habit as opposed to quot;catching up with the Jonesesquot; preferences. This result supports the findings of Parker and Julliard (2005) that the ultimate consumption risk explains more of the cross-sectional variation in stock returns.

Download or read book Agents Preferences the Equity Premium and the Consumption Saving Trade Off written by Ms.Aude Pommeret and published by International Monetary Fund. This book was released on 2001-08-01 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper aims to measure the risk premium on French equities during 1960-92 and to evaluate how well theoretical models based on various representations of agents' preferences can explain it. Aside from the standard, time-additive utility function with constant relative risk aversion, three other utility functions are reviewed: a recursive utility function, a habit formation utility function, and a utility function that accounts for the interdependence of preferences. Both calibration and econometric estimations show that none of the studied marginal changes in the representation of agents' preferences are sufficient to solve both the equity premium puzzle and the risk-free rate puzzle.

Download or read book Consumption Based Asset Pricing Part 2 written by Douglas T. Breeden and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Following Part 1 of this article, which reviews late-1970s to 1990s classic derivations and tests of the consumption capital asset pricing model, here in Part 2 we review more recent developments, some of which are based on utility functions with non-time-separable preferences. Important second-generation consumption-based asset pricing advances are also reviewed, including models with habit formation and long-run risk. These models give large cyclical changes in relative risk aversion and risk premiums as well as lagged impacts of aggregate consumption changes on risk premiums. We review asset pricing with rare disasters and models focused on consumer spending on durables and real estate, as well as the fraction of spending financed by labor income. The second-generation models discussed have more free parameters and fit the empirical data better than did the first-generation consumption-based asset pricing models.

Download or read book Asset Prices Under Habit Formation and Reference dependent Preferences written by Motohiro Yogo and published by . This book was released on 2007 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book An Isomorphism between Asset Pricing Models with and Without Linear Habit Formation written by Mark D. Schroder and published by . This book was released on 2000 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show an isomorphism between optimal portfolio selection or competitive equilibrium models with utilities incorporating linear habit formation, and corresponding models without habit formation. The isomorphism is expressed through an explicit transformation of consumption plans, utilities, endowments, state prices, wealth processes, security prices, and trading strategies that can be used to mechanically transform known solutions not involving habit formation to corresponding solutions with habit formation. For example, the Constantinides (1990) and Ingersoll (1992) solutions are mechanically obtained from the familiar Merton solutions for the additive utility case, without recourse to a Bellman equation or first order conditions. More generally, recent solutions to portfolio selection problems with recursive utility and a stochastic investment opportunity set are readily transformed to novel solutions of corresponding problems with utility that combines recursivity with habit formation. Our methodology also applies in the context of Hindy-Huang-Kreps preferences, where our isomorphism shows that the solution obtained by Hindy and Huang (1993) can be mechanically transformed to Dybvig's (1995) solution to the optimal consumption-investment problem with consumption ratcheting.

Download or read book Habit Formation Heterogeneity written by Eduard Dubin and published by . This book was released on 2017 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: We explicitly solve for the aggregate asset prices in a discrete-time general-equilibrium endowment economy with two agents who differ with respect to their preferences for risk aversion and sensitivity to habit, either internal or external. We compute equilibrium quantities -- equity premium, equity return volatility, Sharpe ratio, interest rate, interest rate volatility, and asset holdings -- via a generalized algorithm of Dumas and Lyasoff (2012, JF). Generalization addresses time-nonseparability of utility function induced by habit. We find that internal habits produce equilibrium asset prices that are more consistent with historically observed aggregate prices relative to external-habit preferences.

Download or read book Two Essays on Equilibrium Asset Pricing and Intertemporal Recursive Utility written by Chenghu Ma and published by . This book was released on 1992 with total page 180 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Intertemporal Recursive Utility and an Equilibrium Asset Pricing Model in the Presence of L vy Jumps written by Chenghu Ma and published by . This book was released on 2001 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Asset Pricing Effects of Recursive Preferences and the Incorporation of Long Run Risk written by and published by . This book was released on 2011 with total page 163 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Empirical Dynamic Asset Pricing written by Kenneth J. Singleton and published by Princeton University Press. This book was released on 2009-12-13 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by one of the leading experts in the field, this book focuses on the interplay between model specification, data collection, and econometric testing of dynamic asset pricing models. The first several chapters provide an in-depth treatment of the econometric methods used in analyzing financial time-series models. The remainder explores the goodness-of-fit of preference-based and no-arbitrage models of equity returns and the term structure of interest rates; equity and fixed-income derivatives prices; and the prices of defaultable securities. Singleton addresses the restrictions on the joint distributions of asset returns and other economic variables implied by dynamic asset pricing models, as well as the interplay between model formulation and the choice of econometric estimation strategy. For each pricing problem, he provides a comprehensive overview of the empirical evidence on goodness-of-fit, with tables and graphs that facilitate critical assessment of the current state of the relevant literatures. As an added feature, Singleton includes throughout the book interesting tidbits of new research. These range from empirical results (not reported elsewhere, or updated from Singleton's previous papers) to new observations about model specification and new econometric methods for testing models. Clear and comprehensive, the book will appeal to researchers at financial institutions as well as advanced students of economics and finance, mathematics, and science.

Download or read book Habit Formation Incomplete Markets and the Significance of Regional Risk for Expected Returns written by George M. Korniotis and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a consumption-based capital asset pricing model (CCAPM) that combines undiversifiable income shocks and external habit formation. Using US state-level data, the paper provides realistic estimates for preference parameters when the external habit of the state investors is based on the consumption of the four Census regions. The model also implies four asset pricing factors: the cross-sectional means of consumption growth and habit growth (capturing national systematic risk) and the cross-sectional variances of consumption growth and habit growth (capturing regional systematic risk). This four-factor model has greater power in explaining expected returns than the CCAPM described in Breeden ().