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|Title:||Predictability and habit persistence|
|Citation:||Journal of Economic Dynamics & Control, 2006; 30(11):2217-2260|
|Publisher:||Elsevier Science BV|
|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|
|Appears in Collections:||Economics publications|
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