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Revisiting asset pricing under habit formation in an overlapping-generations economy

Title
Revisiting asset pricing under habit formation in an overlapping-generations economy
Authors
Kim S.-W.Krausz J.Nam K.
Ewha Authors
김세완
SCOPUS Author ID
김세완scopus
Issue Date
2013
Journal Title
Journal of Banking and Finance
ISSN
0378-4266JCR Link
Citation
vol. 37, no. 1, pp. 132 - 138
Indexed
SSCI; SCOPUS WOS scopus
Abstract
By incorporating habit formation into an overlapping-generations economy, we show that the middle-aged consumers' savings decision has a substantial impact on the equity premium. The higher incentive for savings for the middle-aged, resulting from the habit formation preference, causes an even higher demand for bonds and a lower demand for equity, which eventually generates a lower risk-free rate and a higher required return for holding equity than does the framework of non-habit forming models. Calibration results verify that the habit formation setting, together with an OLG framework is capable of yielding lower bond returns and higher equity returns than the standard CRRA utility models, and the borrowing constraint imposed on the young-aged consumers amplifies the positive effect of habit formation on the equity premium. The findings imply that habit formation preferences within the overlapping-generations framework under the borrowing-constrained economy can provide a more improved explanation of the equity premium puzzle. © 2012 Elsevier B.V.
DOI
10.1016/j.jbankfin.2012.08.018
Appears in Collections:
사회과학대학 > 경제학전공 > Journal papers
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