Asset Prices Under Habit Formation and Reference-Dependent Preferences

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Finance Papers
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Finance
Finance and Financial Management
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Yogo, Motohiro
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This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stocks. The model's conditional moment restrictions are tested on consumption and asset returns data. The empirical estimate of large-scale risk aversion is low, whereas the estimate of loss aversion agrees with prior experimental evidence.

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2008-01-01
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Journal of Business & Economic Statistics
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