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Fast-Moving Habit: Implications for Equity Returns
Published online by Cambridge University Press: 04 July 2023
Abstract
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We find that the Campbell–Cochrane external-habit model can generate a value premium if the persistence of the consumption surplus is sufficiently low. Such low persistence is supported by micro evidence on consumption. If the mean and conditional volatility of consumption growth are highly persistent, as in the Bansal–Yaron long-run risk model, then fast-moving habit can also generate, without eroding the value premium: i) empirically sensible long horizon return predictability; and ii) a price–dividend ratio for market equity that exhibits the high autocorrelation found in the data. Fast-moving habit also delivers several empirical properties of market-dividend strips.
- Type
- Research Article
- Information
- Journal of Financial and Quantitative Analysis , Volume 58 , Issue 7 , November 2023 , pp. 3153 - 3194
- Creative Commons
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.- Copyright
- © The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
The authors thank an anonymous referee, Greg Duffee, Jarrad Harford (the editor), Stijn Van Nieuwerburgh, and participants at two NYU seminars, the Wharton Brown Bag Macro Seminar, a session of the 2011 American Finance Association Meetings, and seminars at Australian National University, Erasmus University, Tilburg University, the University of Washington, the University of Western Australia, and the University of Melbourne for helpful comments and suggestions. The authors also thank Ralph Koijen for generously providing S&P 500-strip portfolios data used in van Binsbergen, Brandt, and Koijen (2012), and Matthieu Gomez for making publicly available code that solves the model in Garleanu and Panageas (2015). All remaining errors are of course the authors’ responsibility. This article was previously circulated under the title “Why Surplus Consumption in the Habit Model May be Less Persistent than You Think.”
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Lynch et al. supplementary material
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