Download or read book Does Intrinsic Habit Formation Actually Resolve the Equity Premium Puzzle? written by David A. Chapman and published by . This book was released on 2001 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Constantinides (1990) describes a simple model of intrinsic habit formation that appears to resolve the quot;equity premium puzzlequot; of Mehra and Prescott (1985). This finding is particularly important, since it has motivated a broader consideration of the implications of habit formation preferences in dynamic equilibrium models. However, consumption growth actually behaves very differently pre- and post-1948, and the explanatory power of the habit formation model is driven by the pre-1948 data. Using data from 1949 to 2000, constructed in a manner comparable to Mehra and Prescott (1985), I demonstrate that intrinsic habit cannot rationalize the unconditional moments of discrete consumption and real asset returns for value function curvature levels below (roughly) 10.75, for any feasible calibration of the model.