Keywords: External habit, expected returns, asset pricing, efficient method of moments
Abstract: We estimate an equilibrium asset pricing model in which agents' preferences have
an unobserved external habit using the efficient method of moments (EMM). Given
the estimated structural parameters we examine the cyclical behavior of expected stock
returns in the model. We find that the estimated structural parameters imply
countercyclical expected stock returns as documented in existing empirical studies. The
model, however, is still rejected at the one percent level. Detailed examination of the
moment conditions in our estimation indicates that the model performs reasonably well
in matching the mean of returns, but it fails to capture the higher order moments.
Full paper (625 KB PDF)
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Last update: June 8, 2005