Specification Tests of Habit Formation
Peng Liu, Yu Ren
Applied Economics Letters
#002197 20131014 (published)
Campbell and Cochrane (1999) propose the habit formation model to explain the equity premium puzzle. They assume that an agent's consumption is affected by habit and describe how habit adjusts to the history of consumption. We use the simulated moment method to test these two speci cations. Empirically, we find that habit plays an important role in an agent's consumption choice, however not in the way Campbell and Cochrane (1999) specify.
JEL-Codes: C13; G12; E21

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