Date of this Version
Journal of Business & Economic Statistics
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.
This is an Accepted Manuscript of an article published by Taylor & Francis in the Journal of Business & Economic Statistics, 2008, available online: http://www.tandfonline.com/10.1198/073500107000000205.
Yogo, M. (2008). Asset Prices Under Habit Formation and Reference-Dependent Preferences. Journal of Business & Economic Statistics, 26 (2), 131-143. http://dx.doi.org/10.1198/073500107000000205
Date Posted: 27 November 2017
This document has been peer reviewed.