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An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications

John Heaton
Econometrica
Vol. 63, No. 3 (May, 1995), pp. 681-717
Published by: Econometric Society
DOI: 10.2307/2171913
Stable URL: http://www.jstor.org/stable/2171913
Page Count: 37
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An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications
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Abstract

Using a Simulated Method of Moments approach, I evaluate a representative consumer asset pricing model in which the consumer is assumed to have time nonseparable preferences of several forms. Examining the model's implications for several moments of asset returns, I find evidence for the local substitution of consumption with habit formation occurring over longer periods of time. The interaction between these two effects is important. I also show that, when accounting for sampling error, a model with local substitution and long-run habit persistence is consistent with the Hansen and Jagannathan (1991) bounds.

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