On Consumption Bunching under Campbell-Cochrane Habit Formation

Abstract

Campbell and Cochrane (1999) propose a preference speci cation that can explain a wide variety of asset pricing puzzles such as the high equity premium. They augment the basic power utility function with a time-varying subsistence level, or \habit", which is in the spirit of \catching up with the Joneses" but with a novel nonlinear mapping of consumption… (More)

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