Habit Formation, Surplus Consumption and Return Predictability: International Evidence

Engsted, Tom; Hyde, Stuart; Møller, Stig Vinther

doi:10.2139/ssrn.1150119

Cited by 14 publications

(13 citation statements)

References 53 publications

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“…Li and Zhong () and Engsted et al. () confirm the expected sign of the SCR in predictive stock market regressions for a number of international markets. The latter authors also report a negative and usually significant impact of the SCR on log bond returns in these markets in line with predictions from the Wachter () model.…”

Section: Introductionmentioning

confidence: 70%

“…Predictive regressions using the SCR are presented by Li (), Li and Zhong (), Møller (), and Engsted et al. (). Using US data, Li () and Møller () report a significant negative impact of the log SCR on the cumulative log excess return on a broad stock market index as expected given the countercyclical nature of the risk premium in the model of Campbell and Cochrane ().…”

Section: Introductionmentioning

confidence: 99%

“…Moreover, Engsted et al. () show that the SCR remains a significant – and often the only significant – predictor of stock and bond returns in multivariate predictive regressions that include additional predictor variables. Together with the theoretical results in Campbell and Cochrane () and Wachter (), these empirical findings justify our focus on the SCR as the only conditioning variable describing the investment opportunity set in the investor's dynamic portfolio choice problem.…”

Section: Introductionmentioning

confidence: 99%

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Parametric Portfolio Policies in the Surplus Consumption Ratio

Inkmann

Shi

2015

Int Rev Finance

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The surplus consumption ratio plays a central role as a state variable in successful attempts to explain the time series properties of stock and bond prices with consumption-based asset pricing models. In this paper, optimal portfolio policies for a strategic investor who maximizes the conditionally expected utility of terminal wealth are parameterized as a polynomial in the surplus consumption ratio. Optimal portfolio policies are estimated using a method of moments estimator based on Euler equations. Unconditional portfolio policies are rejected in favor of conditional policies. Lower order polynomials are rejected in favor of higher order polynomials. Optimal stock and bond allocations are clearly countercyclical. Jel Classification: G11 * We thank an associate editor, an anonymous referee, Ralph Koijen, Arjen Siegman, and participants at a Netspar seminar at Tilburg University and a Netspar International Pension Workshop in Amsterdam for helpful comments. 1 Typically, the required moments of interest for a portfolio choice problem are generated from a VAR(1) model for the evolution of excess returns and state variables over time. This approach is very likely to suffer from misspecification. 2 Campbell and Cochrane (1999) consider a slow-moving nonlinear external habit with an infinite horizon. Li (2001) shows that a linear external habit with a 5-year horizon generates the same implications for the aggregate stock market and matches the data equally well.

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Section: Introductionmentioning

confidence: 70%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Parametric Portfolio Policies in the Surplus Consumption Ratio

Inkmann

Shi

2015

Int Rev Finance

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“…Although there is some evidence of time-varying counter-cyclical riskaversion in recent years, the Campbell-Cochrane model does not produce lower pricing errors or more plausible parameter values than the CRRA model. In Engsted et al (2008) we present further international evidence on the relative performance of the two models. There seems to be quite large cross-country differences in the ability of the Campbell-Cochrane model to explain asset return movements over time.…”

Section: Discussionmentioning

confidence: 94%

An iterated GMM procedure for estimating the Campbell–Cochrane habit formation model, with an application to Danish Stock and bond returns

Engsted

Møller

2009

Int. J Fin Econ

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We suggest an iterated GMM approach to estimate and test the consumption based habit persistence model of Campbell and Cochrane, and we apply the approach on annual and quarterly Danish stock and bond returns. For comparative purposes we also estimate and test the standard constant relative risk-aversion (CRRA) model. In addition, we compare the pricing errors of the different models using Hansen and Jagannathan's specification error measure. The main result is that for Denmark the Campbell-Cochrane model does not seem to perform markedly better than the CRRA model. For the long annual sample period covering more than 80 years there is absolutely no evidence of superior performance of the Campbell-Cochrane model. For the shorter and more recent quarterly data over a 20-30 year period, there is some evidence of counter-cyclical time-variation in the degree of risk-aversion, in accordance with the Campbell-Cochrane model, but the model does not produce lower pricing errors or more plausible parameter estimates than the CRRA model. Copyright © 2009 John Wiley & Sons, Ltd.

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“…By contrast, under the capital asset pricing model (CAPM) developed by Sharpe (1964), which is widely used in empirical literature, risk is measured particularly in markets outside the US. Although there are studies on the CCAPM based on different markets (see, for example, Engsted et al, 2007), the bulk of the literature on CCAPM is limited to the US market. In this study, we focus on the Australian market.…”

Section: Introductionmentioning

confidence: 99%

Stock returns and consumption factors in the Australian market: Cross-sectional tests

Liu

Roca

2011

Australian Journal of Management

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We test conditional consumption capital asset pricing models (CCAPMs) in the Australian equity market. The conditional variables used are Lettau and Ludvigson's (2001a, b) consumption-wealth ratio, Campbell and Cochrane's (1999) surplus consumption ratio and Santos and Veronesi's (2006) labour income to consumption ratio. We examine the cross-sectional implications of these variables using the Fama-French 25 size and book-to-market portfolios and Australian industry portfolios. The Fama-MacBeth (1973) crosssectional regressions on the 25 size/book-to-market portfolios show that the conditional models perform better than the unconditional models. However, these conditional models cannot outperform the FamaFrench three-factor model. The conditional CCAPM, with the labour income to consumption ratio as a scaling factor, can match more closely the performance of the Fama-French three-factor model. We also find that consumption growth is non-contemporaneously related to portfolio returns.

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Habit Formation, Surplus Consumption and Return Predictability: International Evidence

Cited by 14 publications

References 53 publications

Parametric Portfolio Policies in the Surplus Consumption Ratio

Parametric Portfolio Policies in the Surplus Consumption Ratio

An iterated GMM procedure for estimating the Campbell–Cochrane habit formation model, with an application to Danish Stock and bond returns

Stock returns and consumption factors in the Australian market: Cross-sectional tests

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