Tom Engsted

An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish stock and bond returns

Publikation: Working paperForskning

  • Tom Engsted
  • Stig V. Møller, Aarhus School of Business, Danmark
  • Institut for Økonomi
We suggest an iterated GMM approach to estimate and test
the consumption based habit persistence model of Campbell and
Cochrane (1999), and we apply the approach on annual and quarterly
Danish stock and bond returns. For comparative purposes
we also estimate and test the standard CRRA model. In addition,
we compare the pricing errors of the different models using
Hansen and Jagannathan's (1997) specification error measure.
The main result is that for Denmark the Campbell-Cochrane
model does not seem to perform markedly better than the CRRA
model. For the long annual sample period covering more than 80
years there is absolutely no evidence of superior performance of
the Campbell-Cochrane model. For the shorter and more recent
quarterly data over a 20-30 year period, there is some evidence
of counter-cyclical time-variation in the degree of risk-aversion,
in accordance with the Campbell-Cochrane model, but the model
does not produce lower pricing errors or more plausible parameter
estimates than the CRRA model.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider25
StatusUdgivet - 2008

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