|
|||||
|
|
Habit Formation in an Overlapping Generations Model with Borrowing Constraints |
|
| Authors: | Amadeu DaSilva Mira Farka Christos Giannikos |
| Affiliation: | 1. Department of Finance, Mihaylo College of Business and Economics, California State University, Fullerton, USA E‐mail: adasilva@fullerton.edu;2. Department of Economics, Mihaylo College of Business and Economics, California State University, Fullerton, USA E‐mail: efarka@fullerton.edu;3. Department of Economics and Finance, Zicklin School of Business, Baruch College, City University of New York, One Baruch Way, Box B10‐225, New York, NY 10010, USA E‐mail: Christos.Giannikos@baruch.cuny.edu |
| Abstract: | We introduce habit‐formation in the three‐period OLG borrowing‐constrained framework of Constantinides et al. (2002) by allowing the utility of the middle‐aged (old) to depend on consumption when young (middle‐aged). This specification enables us to separate the effect of the two habit parameters (middle‐aged and old) since each representative age‐group can face different levels of habit persistence. The two‐habit setup underlines some important issues with regards to savings and security returns which do not always conform to the standard findings in the literature. In addition, the model produces equity premium consistent with US data for relatively small levels of risk aversion. |
| Keywords: | equity premium puzzle overlapping generations model habit formation risk aversion G0 G12 D10 E21 |