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Good‐Specific Habit Formation and the Cross‐Section of Expected Returns
Author(s) -
BINSBERGEN JULES H. VAN
Publication year - 2016
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12397
Subject(s) - economics , capital asset pricing model , stock (firearms) , habit , consumption (sociology) , microeconomics , asset (computer security) , econometrics , general equilibrium theory , monetary economics , financial economics , mechanical engineering , psychology , social science , computer security , sociology , computer science , engineering , psychotherapist
I study asset prices in a general equilibrium framework in which agents form habits over individual varieties of goods rather than over an aggregate consumption bundle. Goods are produced by monopolistically competitive firms whose elasticities of demand depend on consumers' habit formation. Firms that produce goods with a high habit level relative to consumption have low demand elasticities, set high prices for their product, have low expected returns on their stock, and have low asset pricing betas and stock return volatilities. I find supportive evidence for these predictions in the data.