Habit formation and the equity–premium puzzle: a skeptical view

Athanasoulis, Stefano G.; Sussman, Oren

doi:10.1007/s10436-006-0041-3

Cited by 5 publications

(2 citation statements)

References 13 publications

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“…At equilibrium, each agent found the solution of the above problem and the resulting price of asset i, at time t, is now (see Athanasoulis and Sussman, 2007) …”

Section: Appendix Amentioning

confidence: 99%

Dividend sensitivity to economic factors, stock valuation, and long-run risk

Bergeron

2013

Finance Research Letters

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Available online xxxx JEL classification: D91 G12 Keywords: Multifactor model Intertemporal model Stock valuation CCAPM Long-run risk a b s t r a c tIn this paper, we develop a theoretical stock valuation model that takes into account the long-run sensitivity of dividends to various economic factors. Our valuation process integrates the multidimensionality of uncertainty, as well as the long-run concept of risk (recently proposed in the literature). More precisely, we demonstrate that a stock's long-run dividend growth is negatively related to its current dividend-price ratio and linearly related to N sensitivity coefficients, given by the long-run sensitivity between dividends and economic factors. Then, we show that the equilibrium price of a stock is a function of its current dividend, long-run dividend growth, and N risk parameters.

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“…At equilibrium, each agent found the solution of the above problem and the resulting price of asset i, at time t, is now (see Athanasoulis and Sussman, 2007) …”

Section: Appendix Amentioning

confidence: 99%

Dividend sensitivity to economic factors, stock valuation, and long-run risk

Bergeron

2013

Finance Research Letters

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“…The literature on the equity premium puzzle Fisher, 1997, Athanasoulis andSussman, 2004) has emphasized that habit formation generates excessively volatile short-term interest rates. This would be the case also in the New Keynesian model, but for the fact that the monetary policy authority cares about interest rate smoothing.…”

Section: Expectations Hypothesismentioning

confidence: 99%

Monetary Policy and Rejections of the Expectations Hypothesis

Ravenna

Seppälä

2006

SSRN Journal

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We study the rejection of the expectations hypothesis within a New Keynesian business cycle model. Earlier research has shown that the Lucas general equilibrium asset pricing model can account for neither sign nor magnitude of average risk premia in forward prices, and is unable to explain rejection of the expectations hypothesis. We show that a New Keynesian model with habitformation preferences and a monetary policy feedback rule produces an upwardsloping average term structure of interest rates, procyclical interest rates, and countercyclical term spreads. In the model, as in U.S. data, inverted term structure predicts recessions. Most importantly, a New Keynesian model is able to account for rejections of the expectations hypothesis. Contrary to earlier work, we identify systematic monetary policy as a key factor behind this result. Rejection of the expectation hypothesis can be entirely explained by the volatility of just two real shocks which affect technology and preferences.

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The equity premium: a deeper puzzle

Azeredo

2014

Ann Finance

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Traditional pre-1930 consumption measures understate the extent of serial correlation in the U.S. annual real growth rate of per capita consumption of nondurables and services due to measurement limitations in the construction of their major components. Under alternative measures proposed in this study, the serial correlation of consumption growth is found to be 0.32, contrary to the original estimate of −0.14. This new evidence implies that the class of dynamic general equilibrium models studied by Mehra and Prescott [12] generates negative equity premium for reasonable risk-aversion levels, thus further exacerbating the equity premium puzzle.

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Habit formation and the equity–premium puzzle: a skeptical view

Abstract: Equity premium, Risk-free interest rate, Habit formation, G0, G1,

Cited by 5 publications

References 13 publications

Dividend sensitivity to economic factors, stock valuation, and long-run risk

Dividend sensitivity to economic factors, stock valuation, and long-run risk

Monetary Policy and Rejections of the Expectations Hypothesis

The equity premium: a deeper puzzle

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