Working Paper
Habit persistence and asset returns in an exchange economy
Abstract: We examine asset prices and returns in the context of a version of the pure exchange economy studied in Lucas (1978) and Mehra and Prescott (1985). Our purpose is to identify the key channels by which changes in preferences affect the equity premium and the risk free rate and to develop intuition that is useful for understanding asset pricing in more complicated economies. Our analysis suggests that capital gains play a crucial role in generating empirically plausible mean equity premia.
Keywords: capital asset pricing model; Risk;
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Bibliographic Information
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series, Macroeconomic Issues
Publication Date: 1997
Number: WP-97-04