Asset Prices Under Habit Formation And Catching Up With The Jones

This paper introduces a utility function that nests three classes of utility functions: time-separable utility functions; "Catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and utility functions that display habit formation. Incorporating this utility function into a Lucas (1978) asset pricing model allows calculation of closed-form solutions for the prices of stocks, bills and consols under the assumption that consumption growth is i.i.d. Then equilibrium asset prices are used to examine the equity premium puzzle

Provided by: JSTOR Topic: Big Data Date Added: Dec 2010 Format: PDF

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