Econometrica: May, 1995, Volume 63, Issue 3

An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications

https://doi.org/0012-9682(199505)63:3<681:AEIOAP>2.0.CO;2-L
p. 681-717

John Heaton

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.