A Parsimonious Macroeconomic Model for Asset Pricing: Habit Formation or Cross-sectional Heterogeneity?

Topics:
Investment and Capital Markets
Tags:
Asset,
Asset Management,
Asset Pricing,
Business Operations,
Operational Planning,
University Of Rochester
Source:
University of Rochester

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Overview: This paper studies the asset pricing implications of a parsimonious two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of inter-temporal substitution. The parameter values for the model are taken from the business cycle literature and, in particular, are not calibrated to match financial statistics. Yet, with a risk aversion of two, the model explains a large number of asset pricing phenomena including all the facts matched by the "external habit model".

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Format: PDF | Size: 790KB | Date: Sep 2003 | Pages: 46

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