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Article: Habit formation as a resolution to the equity premium puzzle: what is in the data, what is not.
- Article from:
- Southern Economic Journal
- Article date:
- April 1, 1993
CopyrightCOPYRIGHT 1993 Southern Economic Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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I. Introduction
The consumption based asset pricing model of Lucas |14~ defines a theoretical relationship between streams of consumption and equilibrium asset prices. Since data of both aggregate consumption and asset prices are available, the theory can be tested. Empirical tests of the Lucas model using standard time separable utility functions indicate mismatches between the theory and the data. For example, in the GMM (Generalized Method of Moments) estimation of Hansen and Singleton |9~, overidentifying constraints implied by the model were rejected. Mehra and Prescott |16~ demonstrated the difficulty of explaining a particular statistic: the theoretical ...