Habit Formation and Returns on Bonds and Stocks

40 Pages Posted: 12 Nov 2008

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER); Securities and Exchange Commission

Multiple version iconThere are 5 versions of this paper

Date Written: March 2002

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.

Suggested Citation

Wachter, Jessica A., Habit Formation and Returns on Bonds and Stocks (March 2002). NYU Working Paper No. S-MF-02-04, Available at SSRN: https://ssrn.com/abstract=1300228

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Securities and Exchange Commission ( email )

100 F Street NE
Washington, DC 20549
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
63
Abstract Views
726
Rank
90,781
PlumX Metrics