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Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns

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This paper uses an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane (1999) on the US stock market. The empirical evidence shows that the model is able to explain the size premium, but fails to explain the value premium. Further, the state variable of the model - the surplus consumption ratio - explains counter-cyclical time-varying expected returns on stocks. The model also produces plausible low real risk-free rates despite high relative risk aversion.
OriginalsprogEngelsk
TidsskriftJournal of Empirical Finance
Vol/bind16
Nummer4
Sider (fra-til)525-536
ISSN0927-5398
DOI
StatusUdgivet - 2009

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