I propose a consumption-based asset pricing model that jointly explains the high equity premium, the counter-cyclical behaviour of stock returns, the upward-sloping term structure of interest rates and the downward-sloping term structure of equity. The driving forces behind these results are loss aversion and time-varying habits. The high premium is the reward for holding assets that deliver low returns when consumption descends below habits. The term structure of interests rates is upward-sloping because long-term bonds are more sensitive to fluctuations of discount rates. The term structure of equity is downward-sloping because long-horizon equity gives higher chances to beat consumption habits than short-horizon equity.
Curatola, G.A. (2015). Loss aversion, habit formation and the term structures of equity and interest rates. JOURNAL OF ECONOMIC DYNAMICS & CONTROL, 53, 103-122 [10.1016/j.jedc.2015.02.009].
Loss aversion, habit formation and the term structures of equity and interest rates
CURATOLA, GIULIANO ANTONIO
Conceptualization
2015-01-01
Abstract
I propose a consumption-based asset pricing model that jointly explains the high equity premium, the counter-cyclical behaviour of stock returns, the upward-sloping term structure of interest rates and the downward-sloping term structure of equity. The driving forces behind these results are loss aversion and time-varying habits. The high premium is the reward for holding assets that deliver low returns when consumption descends below habits. The term structure of interests rates is upward-sloping because long-term bonds are more sensitive to fluctuations of discount rates. The term structure of equity is downward-sloping because long-horizon equity gives higher chances to beat consumption habits than short-horizon equity.File | Dimensione | Formato | |
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https://hdl.handle.net/11365/1068591