Skip navigation

Habit Formation and Returns on Bonds and Stocks

Authors: Wachter, Jessica A.
Issue Date: 15-May-2002
Series/Report no.: S-AM-01-04
Abstract: 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. This prediction is shown to be strongly supported by the data.
Appears in Collections:Asset Management

Files in This Item:
File Description SizeFormat 
S-AM-01-04.pdf333 kBAdobe PDFView/Open

Items in FDA are protected by copyright, with all rights reserved, unless otherwise indicated.