Real Business Cycles Model with Habits Formation: A Resolution of the Equity Premium Puzzle

Subject Areas : Labor and Demographic Economics

Seyed Fakhreddin Fakhrhoseini ¹ ( استادیار اقتصاد دانشگاه آزاد واحد تنکابن )

Received: 2017-01-08 Accepted : 2017-01-08 Published : 2016-10-22

Keywords: C22, E32, E17, JEL classification: C11, E52. Keywords: DSGE Model, Capital Adjustment Cost, habits formation, Asset pricing Model,

Abstract :

In economic literature, habits formation has been succeed in reproducing some of the historical financial information and it can simplify the difficulties pertaining to simulating financial markets variables and business cycles. The aim in this paper is investigating performance of habits formation while inseparability between consumption and leisure.  The data are related to the constant prices in 1383 and annually from 1966 to 2014. So, the variables were been detrended   after taking logarithm of the variables by using Hodrick- Prescott filter. The final model equations have been specified around the linearized stabled situation through the Ohlig (1999) approach for linearized stochastic equations, in the form of a space-state model in Matlab programming. The results show that adding habits formation parameter can increase the Sharpe ratio or no risky asset fluctuations and inseparability between consumption and leisure can help explain the equity premium puzzle. 

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