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Type: Journal article
Title: Predictability and habit persistence
Author: Collard, F.
Feve, P.
Ghattassi, I.
Citation: Journal of Economic Dynamics & Control, 2006; 30(11):2217-2260
Publisher: Elsevier Science BV
Issue Date: 2006
ISSN: 0165-1889
Statement of
Fabrice Collard, Patrick Fève and Imen Ghattassi
Abstract: This paper highlights the role of persistence in explaining predictability of excess returns. To this end, we develop a CCAPM model with habit formation when the growth rate of endowments follows a first order Gaussian autoregression. We provide a closed form solution of the price–dividend ratio and determine conditions that guarantee the existence of a bounded equilibrium. The habit stock model is found to possess internal propagation mechanisms that increase persistence. It outperforms the time separable and a ‘Catching up with the Joneses’ version of the model in terms of predictability therefore highlighting the role of persistence in explaining the puzzle.
Keywords: Asset pricing; Catching up with the Joneses; Habit stock; Predictability
RMID: 0020095692
DOI: 10.1016/j.jedc.2005.06.016
Appears in Collections:Economics publications

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