Premium
HABIT PERSISTENCE AND THE NOMINAL TERM PREMIUM PUZZLE: A PARTIAL RESOLUTION
Author(s) -
SALYER KEVIN D.
Publication year - 1995
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1995.tb01888.x
Subject(s) - economics , volatility (finance) , econometrics , habit , term (time) , equity premium puzzle , treasury , persistence (discontinuity) , consumption (sociology) , financial economics , risk premium , psychology , social science , physics , geotechnical engineering , archaeology , quantum mechanics , sociology , engineering , psychotherapist , history
The assumption of habit formation in preferences induces two effects on time series of agents' marginal utility of consumption: greater volatility relative to standard time‐separable preferences and negative serial correlation. This paper examines whether the second property can help explain the behavior of the nominal term premium. A cash‐in‐advance model of interest rates is appended with a model of habit persistence and calibrated to U.S. data. Using yields on three‐ and six‐month U.S. Treasury Bills for comparison, we find the model can indeed duplicate the observed average term premium, but cannot account for the term premium's volatility.