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- Title
ELUCIDATING EQUITY PREMIUM USING CORPORATE DIVIDENDS AND HABIT FORMATION.
- Authors
JOW-RAN CHANG; HSU-HSIEN CHU
- Abstract
This paper extends Longstaff and Piazzesi (2004, Journal of Financial Economics, 74, 40IM21.) to a habit formation model. By combining corporate fraction ratio, and surplus consumption ratio, we derive closed-form solutions for stock values when dividends, habit ratio and consumption follow exponential affine jump-diffusion processes. We can prove that Longstaff and Piazzesi (2004) is only a special case of our model. In addition, calibrated results show that the corporate fraction and habit ratio to shocks significantly increases the equity premium and decreases the risk-free rate. The model determines realistic values for the equity premium and the risk-free rate.
- Subjects
STOCKS (Finance); DIVIDENDS; HABIT formation
- Publication
Annals of Financial Economics, 2015, Vol 10, Issue 2, p1
- ISSN
2010-4952
- Publication type
Article
- DOI
10.1142/S2010495215500141