Open Access
A consumption CAPM with a reference level
Renê Garcia Junior
- 30 Mar 2006
30
TL;DR: In this article, an intertemporal asset pricing model was proposed in which a representative consumer maximizes expected utility derived from both the ratio of his consumption to some reference level and this level itself.
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Abstract: We study an intertemporal asset pricing model in which a representative consumer maximizes expected utility derived from both the ratio of his consumption to some reference level and this level itself. If the reference consumption level is assumed to be determined by past consumption levels, the model generalizes the usual habit formation specifications. When the reference level growth rate is made dependent on the market portfolio return and on past consumption growth, the model mixes a consumption CAPM with habit formation together with the CAPM. It therefore provides, in an expected utility framework, a generalization of the non-expected recursive utility model of Epstein and Zin (1989). When we estimate this specification with aggregate per capita consumption, we obtain economically plausible values of the preference parameters, in contrast with the habit formation or the Epstein-Zin cases taken separately. All tests performed with various preference specifications confirm that the reference level enters significantly in the pricing kernel. JEL classification: G12
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Citations
Asset Prices Under Habit Formation and Reference-Dependent Preferences
Motohiro Yogo,Motohiro Yogo +1 more
TL;DR: In this article, the authors explain the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion.
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Habit persistence: Explaining cross sectional variation in returns and time-varying expected returns
TL;DR: This paper found empirical support for the habit persistence model of Campbell and Cochrane (1999) along both cross-sectional and time-series dimensions of the US stock market over the period 1947-2005.
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Consumption Volatility and the Cross-Section of Stock Returns
TL;DR: In this paper, the authors investigated the relationship between macroeconomic uncertainty and stock returns and found that long-run volatility risk is relevant for interpreting differences in risk compensation across assets, and proposed a reduced-form general equilibrium model that rationalizes the empirical evidence.
The Horizon of Systematic Risk: A New Beta Representation
Federico M. Bandi,Andrea Tamoni +1 more
TL;DR: In this article, a business cycle consumption factor can explain the differences in risk premia across alternative portfolios, including recently-proposed anomalies portfolios, and the authors argue that explicit allowance for a separation between consumption fluctuations with heterogeneous durations is important for interpreting cross-sectional pricing as well as the time-series dynamics of consumption and returns across horizons.
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Habit Formation, Surplus Consumption and Return Predictability: International Evidence
TL;DR: In this paper, the authors used an iterated GMM procedure to estimate and test the Campbell and Cochrane (1999) habit formation model with a time-varying risk-free rate.
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