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An Exploration of Asset Returns in a Production Economy with Relative Habits

Author

Listed:
  • Santiago Budria

    (University of Madeira & CEEAplA)

Abstract
This paper explores asset returns in a production economy with habit forming households. I show that a model with capital adjustment costs and relative habits is consistent with salient financial facts, such as the equity premium, the market price of risk, and the riskfree interest rate. These predictions are not at odds with good business cycle predictions. In the model economy investment is strongly procyclical and more volatile than output, which in turn is more volatile than consumption. Moreover, consumption growth is positively autocorrelated and negatively (positively) correlated with future (past) stock returns.

Suggested Citation

  • Santiago Budria, 2005. "An Exploration of Asset Returns in a Production Economy with Relative Habits," Finance 0505004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0505004
    Note: Type of Document - pdf; pages: 30
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Equity premium; Business cycles; Habit persistence.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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