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HABIT PERSISTENCE AND ASSET RETURNS IN AN EXCHANGE ECONOMY

Published online by Cambridge University Press:  02 March 2005

MICHELE BOLDRIN ,
LAWRENCE J. CHRISTIANO  and
JONAS D.M. FISHER
MICHELE BOLDRIN
Affiliation:
Universidad Carlos III and CEPR
LAWRENCE J. CHRISTIANO
Affiliation:
Northwestern University Federal Reserve Bank of Chicago and NBER
JONAS D.M. FISHER
Affiliation:
Federal Reserve Bank of Chicago and University of Western Ontario
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Extract

We examine asset prices and returns in the context of a pure exchange economy. Our purpose is to identify the key channels by which changes in preferences affect the equity premium and the risk-free rate and to develop intuition that is useful for understanding asset pricing in more complicated economies. Our analysis suggests that capital gains play a crucial role in generating empirically plausible mean equity premia.

Keywords

Habit PersistenceAsset PricingCapital GainsRisk Aversion
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 2 , June 1997 , pp. 312 - 332
Copyright
© 1997 Cambridge University Press

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