Habit Formation and Returns on Bonds and Stocks
- Topics:
- Investment and Capital Markets
- Tags:
- Bond,
- Finance,
- Investment,
- New York University,
- Stock
- Source:
- New York University
FREE Registration is required
Overview: This paper proposes a habit formation model that explains the failure of the expectations hypothesis documented by Campbell and Shiller (1991) and Fama and Bliss (1987). The model also produces positive excess returns on long-term bonds, an upward sloping average yield curve, and allows for realistic levels of time-variation in the mean of consumption growth. The model generates a novel empirical prediction: Long lags of consumption growth predict the short-term interest rate with a negative sign.
(Is this item miscategorized? Does it need more tags? Let us know.)
Format: PDF | Size: 333KB | Date: May 2002 | Pages: 40
