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## By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior (1999)

Citations: | 1422 - 68 self |

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Citation Context ...turn variances are somewhat less thansk times 1-year return variances, so the market Sharpe ratio grows, ifsanything, faster than the square root of the horizon (MaCurdy andsShoven 1992; Siege1 1994; =-=Campbell 1996-=-).sIn our model, the k-period stochastic discount factor issEquation (6) implies that the standard deviation of this discountsfactor must increase roughly with the square root of the horizon tosbe con... |

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Citation Context ... one for oneswith estimates of conditional mean returns. Hence the slope of thesconditional mean-variance frontier, a measure of the price of risk,schanges through time with a business cycle pattern (=-=Harvey 1989-=-;sChou, Engle, and Kane 1992).sAs yet, there is no accepted economic explanation for these obser-svations. In the language of finance, we lack a successful theory andsmeasurement procedure for the fun... |

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Citation Context ...Second, we specify that habit moves slowly in response to con-ssumption, in contrast to empirical specifications in which each pe-sriod's habit is proportional to the last period's consumption (e.g.,s=-=Ferson and Constantinides 1991-=-). This feature produces slow meansreversion in the price/dividend ratio, long-horizon return fore-scastability, and persistent movements in volatility.sThird, we specify that habit adapts nonlinearly... |

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Citation Context ...ement cannot be explained by variation in expectedsdividends or interest rates, indicating large countercyclical variationsin expected excess returns (Campbell and Shiller 1988a, 1988b;sShiller 1989; =-=Cochrane 1991-=-, 1992). Estimates of conditional vari-sances of returns also change through time (see Bollerslev, Chou,sand Kroner [I9921 for a survey), but they do not move one for oneswith estimates of conditional... |

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Citation Context ...umption Growth and Stock ReturnssThe static capital asset pricing model (CAPM) often does a bettersjob of accounting for risk premia than the consumption-based assetspricing model with power utility (=-=Mankiw and Shapiro 1986-=-). Itsturns out that this is true in our artificial data as well, even thoughsthe data are generated by a consumption-based model. Campbellsand Cochrane (1998b) present detailed calculations. We show ... |

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1 |
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(Show Context)
Citation Context ...se givensthat the dividend claim and consumption claim price/dividend ratios are almost identical.sReturns display a series of small negative autocorrelations thatsgenerate univariate mean reversion (=-=Fama and French 1988-=-b; PoTABLE 3sAUTOCORRELATIONS AND HISTORICALOF IMULATED DATAsLAG (Years)sp - d :sConsumption claimsDividend claimsPostwar samplesLong samplesr - rJ:sConsumption claimsDividend claimsPostwar samplesLon... |

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