Habit Formation , the Cross Section of Stock Returns and the Cash-Flow Risk Puzzle ∗

  title={Habit Formation , the Cross Section of Stock Returns and the Cash-Flow Risk Puzzle ∗},
  author={Tano Santos},
Non-linear external habit persistence models, which feature prominently in the recent “equity premium” asset pricing and macroeconomics literature, generate counterfactual predictions in the cross section of stock returns. In particular, we show that in the absence of cross sectional heterogeneity in firms’ cash-flow risk these models produce a “growth premium,” that is, stocks with high price-to-fundamental ratios command a higher premium than stocks with low price-to-fundamental ratios. This… CONTINUE READING
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