Full text of Working Papers (Federal Reserve Bank of Chicago) : Habit Persistence and Asset Returns in an Exchange Economy, Working Paper 1997-04

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5<

Figure 1. Power Utility and Persistence in Consumption Growth
20
Circles: phi = 1, 2, 3, 4, 5, 10, 15, 20, 25, 30, 35

Equity Premium (AR%)

15

10

Mehra-Prescott, c growth autocorr = -0.14

5%
1%
Power utility, c growth autocorr = -0.34

5 U.S. data

0

Power utility, c growth autocorr = 0.3

-5
Mehra-Prescott, c growth autocorr = 0.14
-10
-10

0

10

20

30
40
50
60
Risk Free Rate (AR%)

63

70

80

90

Figure 2. Impact of habit persistence parameters, h and b
25
h=0.0

Equity Premium (AR%)

20

x = b/(exp(theta)-h)
theta = 0.0045
x = 0.85
h=0.1

15
h=0.2

x = 0.83

1%
10

Optimum
(b=0.58,
h=0.3, J=0.38)
h=0.8

5%
5

0
-2

U.S. Data

-1

0

x = 0.81
x = 0.30
1
2
3
4
Risk Free Rate (AR%)

64

5

6
Full text of Working Papers (Federal Reserve Bank of Chicago) : Habit Persistence and Asset Returns in an Exchange Economy, Working Paper 1997-04

FRASER
