Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-14T01:12:59.565Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON THE EXACT SOLUTION OF ASSET PRICING MODELS WITH HABIT PERSISTENCE

Published online by Cambridge University Press:  13 April 2006

FABRICE COLLARD ,
PATRICK FÈVE  and
IMEN GHATTASSI
FABRICE COLLARD
Affiliation:
University of Toulouse (CNRS-GREMAQ and IDEI)
PATRICK FÈVE
Affiliation:
University of Toulouse (GREMAQ and IDEI) and Banque de France (Research Division)
IMEN GHATTASSI
Affiliation:
University of Toulouse (GREMAQ)
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a closed-form solution to a standard asset pricing model with habit formation when the growth rate of endowment follows a first-order Gaussian autoregressive process. We determine conditions that guarantee the existence of a stationary bounded equilibrium. The findings are useful because they allow to evaluate the accuracy of various approximation methods to nonlinear rational expectation models. Furthermore, they can be used to perform simulation experiments to study the finite sample properties of various estimation methods.

Keywords

Asset PricingPrice–Dividend RatioHabit Persistence
Type
NOTE
Information
Macroeconomic Dynamics , Volume 10 , Issue 2 , April 2006 , pp. 273 - 283
Copyright
© 2006 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel Andrew B. 1990 Asset prices under habit formation and catching up with the Joneses. American Economic Review, Papers and Proceedings 80, 38– 42.Google Scholar
Abel Andrew B. 1999 Risk premia and term premia in general equilibrium. Journal of Monetary Economics 43, 3– 33.Google Scholar
Burnside Craig 1998 Solving asset pricing models with Gaussian shocks. Journal of Economic Dynamics and Control 22, 329– 340.Google Scholar
Cecchetti Stephen G., Lam Pok–Sang, and Nelson C. Mark 1993 The equity premium and the risk–free rate. Journal of Monetary Economics 31, 21– 45.Google Scholar
Lucas Robert E. 1978 Asset prices in an exchange economy. Econometrica 46, 1429– 1445.Google Scholar
Mehra Rajnish and Edward C. Prescott 1985 The equity premium: a puzzle. Journal of Monetary Economics 15, 145– 161.Google Scholar
Tsionas Efthymios G. 2003 Exact solution of asset pricing models with arbitrary shock distributions. Journal of Economic Dynamics and Control 27, 843– 851.Google Scholar