Habit formation: a resolution of the equity premium puzzle?

@article{citeulike:117722, abstract = {We explore how the introduction of habit preferences into the simple intertemporal consumption-based capital asset pricing model "solves" the equity premium and risk-free rate puzzles. While agents with time-separable preferences care only about the overall volatility of consumption, we show that agents with habit preferences care not only about overall volatility, but also about the temporal distribution of that volatility. Specifically, habit agents are much more averse to high-frequency fluctuations than to low-frequency fluctuations. In fact, the size of the equity premium in the habit model is determined by a relatively insignificant amount of high-frequency volatility in U.S. consumption.}, author = {Otrok, Christopher and Ravikumar, B. and Whiteman, Charles H.}, citeulike-article-id = {117722}, doi = {10.1016/S0304-3932(02)00147-2}, journal = {Journal of Monetary Economics}, keywords = {asset\_pricing, macroeconomics}, month = {September}, number = {6}, pages = {1261--1288}, posted-at = {2005-03-09 10:42:53}, priority = {2}, title = {Habit formation: a resolution of the equity premium puzzle?}, url = {http://dx.doi.org/10.1016/S0304-3932(02)00147-2}, volume = {49}, year = {2002} }

TY - JOUR ID - citeulike:117722 L3 - citeulike-article-id:117722 N2 - We explore how the introduction of habit preferences into the simple intertemporal consumption-based capital asset pricing model "solves" the equity premium and risk-free rate puzzles. While agents with time-separable preferences care only about the overall volatility of consumption, we show that agents with habit preferences care not only about overall volatility, but also about the temporal distribution of that volatility. Specifically, habit agents are much more averse to high-frequency fluctuations than to low-frequency fluctuations. In fact, the size of the equity premium in the habit model is determined by a relatively insignificant amount of high-frequency volatility in U.S. consumption. IS - 6 JF - Journal of Monetary Economics EP - 1288 TI - Habit formation: a resolution of the equity premium puzzle? VL - 49 SP - 1261 KW - asset_pricing KW - macroeconomics AU - Otrok, Christopher AU - Ravikumar, B AU - Whiteman, Charles PY - 2002/09// UR - http://dx.doi.org/10.1016/S0304-3932(02)00147-2 ER -