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N° 2000 - 19 |
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| December |
| Consumption Habit and Equity Premium in
the G7 Countries |
Olivier Allais
Loïc Cadiou
Stéphane Dées |
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| The consumption capital asset pricing model
(C-CAPM) fails to explain the observed equity premia apart from considering implausible
values of the risk aversion coefficient. This equity premium puzzle has been attributed
in particular to the time-separability of the consumers' preferences. This paper
investigates empirically the ability of the C-CAPM to solve this puzzle once assumed
that consumption behaviour presents habit formation. From the estimation of the
model's parameters for the G7 countries, we show that the consumption model with
habit formation is able to account for financial asset returns with more reasonable
preference. |
Abstract |
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| Consumption, habit formation,
equity premium, Generalized method of moments |
Keywords |
| C13, E21, E44, G12 |
JEL classification |
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