Why Surplus Consumption in the Habit Model May Be Less Persistent than You Think

Abstract

The authors would like to thank Stijn Van Nieuwerburgh, Greg Du®ee, and participants at two NYU seminars, the Wharton Brown Bag Macro Seminar, and a session of the 2011 AFA Meetings for helpful comments and suggestions. All remaining errors are of course the authors' responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Composition of wealth, conditioning information, and the cross-section of stock returns

“…The evidence presented here suggests that greater covariation of returns with the measure of consumption growth might not be sufficient to explain the value premium by itself. This finding mirrors the theoretical arguments of Lettau and Wachter (2007) and Santos and Veronesi (2010) that models with time-varying risk aversion driven by habit formation cannot explain the value premium if growth stocks are viewed as long duration assets and therefore more sensitive to variation in discount rates (see also Lynch and Randall (2010)). The fact that the conditional covariances and conditional expected returns on value portfolios do not move in the same direction as functions of conditioning information suggests that another risk factor might be required whose dynamics would play an offsetting role.…”

The Term Structure of Returns: Facts and Theory

“…Three key examples are Lettau and Wachter (2007), Lettau and Wachter (2011), and Lynch and Randall (2011). Lettau and Wachter (2007) allow for a temporary component in dividends that receives a high risk price.…”

Nominal Rigidities and the Term Structures of Equity and Bond Returns

“…As shown by Campbell and Cochrane (1999) and Lynch and Randall (2011), specifications (A.1b) and (A.1c) imply the local habit structure…”

“…While the search for a structural explanation of the positive slope of the term structure of interest rates has a rather long history (see, for example,Gürkaynak and Wright, 2012;Duffee, 2013), the search for a structural explanation for the negative slope of the term structure of equity has only recently received a lot of attention(Croce, Lettau and Ludvigson, 2015;Belo, Collin-Dufresne and Goldstein, 2015;Lynch and Randall, 2011;Ai, Croce, Diercks and Li, 2013;Marfè, 2013;Nakamura, Steinsson, Barro and Ursúa, 2013;Wachter, 2013); see alsoBinsbergen and Koijen (2015).6 This property motivates from first principles the descriptive structure assumed byLettau and Wachter (2011) that lies behind their ability to capture the initial slopes of the term structures of equity and real interest rates.…”

“…For example, in a recent study of Campbell-Cochrane habits with non-random-walk cashflows,Lynch and Randall (2011) adopt specification (A.1c).…”