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Q. Dai and O. V. Grishchenko, “An Empirical Investigation of Consumption-Based Asset Pricing Models with Stochastic Habit Formation,” 2004.

has been cited by the following article:

• TITLE: Asset Pricing with Stochastic Habit Formation

  AUTHORS: Masao Nakagawa

  KEYWORDS: Asset Pricing; Stochastic Habit Formation

  JOURNAL NAME: Journal of Mathematical Finance, Vol.2 No.2, May 23, 2012

  ABSTRACT: This paper examines optimal consumption/portfolio choices under stochastic habit formation in which it is uncertain how deep consumers would become in the habit of consuming in future. By extending Shroder and Skiadas [1] to stochastic habit formation, the optimization problem with stochastic habit forming preferences is transformed into that with simple time-additive preferences. Optimal portfolios are composed of the tangency portfolio and habit hedging portfolio. Resulting risk premia are characterized by consumption beta, which is proportionate to the covariance with consumption changes, and habit beta, defined by using the covariance with habit.