Finance Papers

Document Type

Journal Article

Date of this Version

5-1990

Publication Source

American Economic Review, Papers and Proceedings

Volume

80

Issue

2

Start Page

38

Last Page

42

Abstract

This paper introduces a utility function that nests three classes of utility functions: (1) time-separable utility functions; (2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and (3) utility functions that display habit formation. Closed-form solutions for equilibrium asset prices are derived under the assumption that consumption growth is i.i.d. The equity premia under catching up with the Joneses and under habit formation are, for some parameter values, as large as the historically observed equity premium in the United States.

Copyright/Permission Statement

Copyright © 1990 by the American Economic Association.Abel, Andrew B. "Asset Prices under Habit Formation and Catching up with the Joneses." The American Economic Review 80, no. 2 (1990): 38-42.

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Date Posted: 27 November 2017

This document has been peer reviewed.