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Expected Returns And Habit Persistence
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Book Synopsis Expected Returns and Habit Persistence by : Yuming Li
Download or read book Expected Returns and Habit Persistence written by Yuming Li and published by . This book was released on 2001 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a consumption-based asset pricing model with infinite-horizon nonlinear habit formation, Campbell and Cochrane (1999) show that low consumption in surplus of habit should forecast high expected returns. This article argues that the finite-horizon linear habit model also implies an inverse relation between expected returns and surplus consumption. This article also presents empirical evidence, which indicates that expected returns on stocks and bonds vary with surplus consumption implied by the habit models. The volatility of returns and the reward to volatility are also related to surplus consumption. However, less than 30 percent of the predictable variation of expected returns, using standard lagged information variables, is attributed to surplus consumption.
Download or read book Habit Persistence written by and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Habit persistence, consumption based asset pricing and time-varying expected returns by : Stig Vinther Møller
Download or read book Habit persistence, consumption based asset pricing and time-varying expected returns written by Stig Vinther Møller and published by . This book was released on 2008 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Good-Specifc Habit Formation and the Cross Section of Expected Returns by : Jules H. van Binsbergen
Download or read book Good-Specifc Habit Formation and the Cross Section of Expected Returns written by Jules H. van Binsbergen and published by . This book was released on 2013 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: I study the cross-section of expected stock returns in a general equilibrium framework where agents form habits over individual varieties of goods. Goods are produced by monopolistically competitive firms whose income and price elasticities of demand depend on the habit formation of the consumers. Firms that produce goods with a high habit level relative to consumption have low income and price elasticities, set high prices for their product, and have low expected returns on their stock. Taking this prediction to the data, I find a return spread that is hard to explain by commonly used empirical asset pricing models.
Book Synopsis Phd-afhandling by : Stig Vinther Møller
Download or read book Phd-afhandling written by Stig Vinther Møller and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Habit Formation and the Cross Section of Stock Returns by : Lior Menzly
Download or read book Habit Formation and the Cross Section of Stock Returns written by Lior Menzly and published by . This book was released on 2011 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop an external habit persistence model where the time series of the aggregate portfolio and the cross section of stock returns are simultaneously studied and tested. By applying a slightly modified version of the model of Campbell and Cochrane (1999), we obtain closed form solutions for individual securities prices and returns and a full characterizations of the dynamics of the risk-return characteristics of individual securities. We find that each stock return quot;betaquot; with respect to the total wealth portfolios is jointly determined by an aggregate variable that depends on the habit level, and an idiosyncratic asset characteristics that depends on the contribution of the security to total consumption relative to its long-run average contribution. This functional form imposes tight predictions on the cross sectional test, including sign and magnitude of the coefficients, and insures that the explanatory power of the beta comes from the predictable part of the realization of returns. An estimate of the model for a set of 20 industry portfolios is able to explain cross-sectional variation in the conditional expected returns. Moreover, the model generates price consumption ratios for individual industries that track well the empirical ones.
Book Synopsis Habit Formation, Surplus Consumption and Return Predictability by : Tom Engsted
Download or read book Habit Formation, Surplus Consumption and Return Predictability written by Tom Engsted and published by . This book was released on 2011 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: On an international post World War II dataset, we use an iterated GMM procedure to estimate and test the Campbell and Cochrane (1999) habit formation model with a time-varying risk-free rate. In addition, we analyze the predictive power of the surplus consumption ratio for future stock and bond returns. We find that, although there are important cross-country differences and economically significant pricing errors, for the majority of countries in our sample the model gets empirical support in a variety of different dimensions, including reasonable estimates of risk-free rates. Further, for the majority of countries the surplus consumption ratio captures time-variation in expected returns. Together with the price-dividend ratio, the surplus consumption ratio contains significant information about future stock returns, also during the 1990s. In addition, in most countries the surplus consumption ratio is also a powerful predictor of future bond returns. Thus, the surplus consumption ratio captures time-varying expected returns in both stock and bond markets.
Book Synopsis Habit Formation, Incomplete Markets, and the Significance of Regional Risk for Expected Returns by : George M. Korniotis
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 2008 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper introduces a consumption-based CAPM (CCAPM) that combines undiversifiable income shocks and external habit formation. Using U.S. 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 of Breeden (1979).
Book Synopsis By Force of Habit by : John Y. Campbell
Download or read book By Force of Habit written by John Y. Campbell and published by . This book was released on 1995 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.
Book Synopsis Financial Markets and the Real Economy by : John H. Cochrane
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Book Synopsis Why Surplus Consumption in the Habit Model May be Less Persistent Than You Think by : Anthony W. Lynch
Download or read book Why Surplus Consumption in the Habit Model May be Less Persistent Than You Think written by Anthony W. Lynch and published by . This book was released on 2011 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: In U.S. data, value stocks have higher expected excess returns and higher CAPM alphas than growth stocks. We find the external-habit model of Campbell and Cochrane (1999) can generate a value premium in both CAPM alpha and expected excess return so long as the persistence of the log surplus-consumption ratio is not too high. In contrast, Lettau and Wachter (2007) find that when the log surplus-consumption ratio is assumed to be highly persistent as in Campbell and Cochrane, the external-habit model generates a growth premium in expected excess return. However, the micro evidence favors a less persistent log surplus-consumption ratio. We choose a value for this persistence which is sufficiently low that the most recent 2 years of log consumption contribute over 98% of all past consumption to log habit, which is a much more reasonable number than the 25% contribution generated by the Lettau-Wachter value. In our model, expected consumption is slowly mean-reverting, as in the long-run risk model of Bansal and Yaron (2004), which is why our model is able to generate a price-dividend ratio for aggregate equity that exhibits the high autocorrelation found in the data, despite the very low persistence of the price-of-risk state variable. Our results suggest that an external habit model in the spirit of Campbell and Cochrane can deliver an empirically sensible value premium once the persistence of the surplus consumption ratio is calibrated to the micro evidence rather than set to a value close to one. When we allow the conditional volatility of consumption growth to also be slowly mean reverting as in the long-run risk model of Bansal and Yaron, our model is also able to generate empirically sensible predictability of long-horizon returns using the price-dividend ratio, without eroding the value premium
Book Synopsis External Habit and the Cyclicality of Expected Stock Returns by : Thomas D. Tallarini
Download or read book External Habit and the Cyclicality of Expected Stock Returns written by Thomas D. Tallarini and published by . This book was released on 2005 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis External Habit Formation and Asset Prices by : Julian Veil
Download or read book External Habit Formation and Asset Prices written by Julian Veil and published by GRIN Verlag. This book was released on 2021-04-13 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: Seminar paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,0, University of Frankfurt (Main) (Finanzen), language: English, abstract: This paper aims to explain the countercyclical behavior of the equity risk premium and the stock return volatility by introducing an external habit formation feature in the standard representative-agent consumption-based asset pricing model, in form of the so called “catching up with the Joneses” preferences. These preferences imply that the relative risk aversion of the agents in the economy is constant over time and varies across the agents, which generates an endogenous wealth process, that in turn creates a countercyclical behavior in the risk premium and the conditional stock return volatility. As the agents with lower risk aversion distribute a greater fraction of their wealth to risky assets, their wealth decreases relatively more in reaction to cyclical downturns, shifting the aggregate wealth towards more risk averse individuals. These more risk averse agents, however, demand a higher compensation for risk, leading to an increase of the aggregate equity risk premium in response to a fall in stock prices. One of the most studied topics in modern economics are the market mechanisms that lead to the determination of asset prices in an economy. The empirical research indicates that there is a link between the historically observed asset prices and macroeconomic developments. One of the most important observations are the countercyclical behavior of the equity risk premium and the stock return volatility, implying that the excess return of common stocks over the risk-free rate during business cycle troughs is significantly higher than during expansions.
Book Synopsis Surplus Consumption Ratio and Expected Stock Returns by : Imen Ghattassi
Download or read book Surplus Consumption Ratio and Expected Stock Returns written by Imen Ghattassi and published by . This book was released on 2013 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: Based on Campbell and Cochrane [1999] Consumption-Based Asset Pricing Model (C)CAPM with habit formation, this paper provides empirical evidence in favor of the importance of habit persistence in asset pricing. Using U.S data, we show that the surplus consumption ratio is a strong predictor of excess returns at long-horizons and that it captures a component of expected returns, not explained by the consumption-wealth ratio. Moreover, this paper shows that the (C)CAPM with habit formation performs far better than the standard (C)CAPM in accounting for the cross-sectional variations in average excess returns on the 25 FA MA-FRENCH portfolios sorted by size and book-to-market value.
Book Synopsis Habit Formation and Returns on Bonds and Stocks by : Jessica A. Wachter
Download or read book Habit Formation and Returns on Bonds and Stocks written by Jessica A. Wachter and published by . This book was released on 2011 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a habit formation model that captures the ability of the yield spread to predict excess returns on bonds as documented in empirical studies. The model, a generalization of Campbell and Cochrane (1999), also captures the predictability of stock returns by the price-dividend ratio, a high equity premium, excess volatility, positive excess returns on bonds, and an upward sloping average yield curve. The model is shown to imply a joint process for interest rates and consumption. When this process is estimated from the data, a new empirical fact emerges: Controlling for contemporaneous consumption growth, long lags of consumption predict the interest rate. Thus the success of the model is based on a more realistic process for consumption and the interest rate, rather than additional degrees of freedom in the utility function.
Book Synopsis C-CAPM Refinements and the Cross-Section of Returns by : Paul Söderlind
Download or read book C-CAPM Refinements and the Cross-Section of Returns written by Paul Söderlind and published by . This book was released on 2013 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies if the consumption-based asset pricing model can explain the cross-section of expected returns. The CRRA model and several refinements (habit persistence and idiosyncratic shocks) all imply that the conditional expected return is linearly increasing in the asset's conditional covariance with consumption growth. Results from quarterly data on the 25 Fama-French portfolios suggest that the model has serious problems: there are large and systematic pricing errors. In addition, the estimated time-varying effective risk aversion coefficients appear implausible and are unrelated with most candidates for habit persistence and idiosyncratic risk.
Book Synopsis Expected Returns and the Business Cycle by : Lars A. Lochstoer
Download or read book Expected Returns and the Business Cycle written by Lars A. Lochstoer and published by . This book was released on 2011 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a representative agent habit formation model where preferences are defined over both luxury goods and basic goods. The model matches the equity risk premium, risk free rate, and volatilities. From the intratemporal first order condition we can substitute out basic good consumption and the habit level, yielding a stochastic discount factor driven by two observable risk factors: luxury good consumption growth, and the relative price of the two goods. We estimate these processes and find them to be heteroskedastic, implying time-variation in the conditional volatility of our stochastic discount factor. These dynamics occur both at the business cycle frequency and at a lower, quot;generational frequencyquot;. Consistent with the model's predictions, we empirically document the existence of these two frequencies in the equity premium, where the lower frequency is quantitatively more important. We also investigate the model's implications for bond returns, and relate their predictability to the low frequency variation in the conditional volatility of the relative price growth.
