Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

Habit Formation, Incomplete Markets, and the Significance of Regional Risk for Expected Returns

George M. Korniotis
The Review of Financial Studies
Vol. 21, No. 5 (Sep., 2008), pp. 2139-2172
Stable URL: http://www.jstor.org/stable/40056879
Page Count: 34
  • Download ($42.00)
  • Cite this Item
Habit Formation, Incomplete Markets, and the Significance of Regional Risk for Expected Returns
Preview not available

Abstract

This paper introduces a consumption-based capital asset pricing model (CCAPM) that combines undiversifiable income shocks and external habit formation. Using US state-level data, the paper provides realistic estimates for preference parameters when the external habit of the state investors is based on the consumption of the four Census regions. The model also implies four asset pricing factors: The cross-sectional means of consumption growth and habit growth (capturing national systematic risk) and the cross-sectional variances of consumption growth and habit growth (capturing regional systematic risk). This four-factor model has greater power in explaining expected returns than the CCAPM described in Breeden(1979).

Page Thumbnails

  • Thumbnail: Page 
[2139]
    [2139]
  • Thumbnail: Page 
2140
    2140
  • Thumbnail: Page 
2141
    2141
  • Thumbnail: Page 
2142
    2142
  • Thumbnail: Page 
2143
    2143
  • Thumbnail: Page 
2144
    2144
  • Thumbnail: Page 
2145
    2145
  • Thumbnail: Page 
2146
    2146
  • Thumbnail: Page 
2147
    2147
  • Thumbnail: Page 
2148
    2148
  • Thumbnail: Page 
2149
    2149
  • Thumbnail: Page 
2150
    2150
  • Thumbnail: Page 
2151
    2151
  • Thumbnail: Page 
2152
    2152
  • Thumbnail: Page 
2153
    2153
  • Thumbnail: Page 
2154
    2154
  • Thumbnail: Page 
2155
    2155
  • Thumbnail: Page 
2156
    2156
  • Thumbnail: Page 
2157
    2157
  • Thumbnail: Page 
2158
    2158
  • Thumbnail: Page 
2159
    2159
  • Thumbnail: Page 
2160
    2160
  • Thumbnail: Page 
2161
    2161
  • Thumbnail: Page 
2162
    2162
  • Thumbnail: Page 
2163
    2163
  • Thumbnail: Page 
2164
    2164
  • Thumbnail: Page 
2165
    2165
  • Thumbnail: Page 
2166
    2166
  • Thumbnail: Page 
2167
    2167
  • Thumbnail: Page 
2168
    2168
  • Thumbnail: Page 
2169
    2169
  • Thumbnail: Page 
2170
    2170
  • Thumbnail: Page 
2171
    2171
  • Thumbnail: Page 
2172
    2172