An Empirical Investigation of the Campbell-Cochrane Habit Utility Model

This paper tests whether the <link rid="b3">Campbell and Cochrane (1999)</link> habit utility model generates a valid stochastic discount factor for the 25 Fama-French size/book-to-market and size/momentum sorted portfolios. <link rid="b3">Campbell and Cochrane (1999)</link> derive a consumption based habit utility asset pricing model and calibrate it to aggregate US stock market data. However, they do not test whether their model is consistent with a larger cross section of asset returns. We test their model using the methodology of <link rid="b15">Hansen and Jagannathan (1991)</link> and <link rid="b2">Burnside (1994)</link>. In contrast to previous studies, we find that for reasonable parameter values, the model's stochastic discount factor is inside the Hansen-Jagannathan bounds and therefore satisfies the necessary conditions for a valid stochastic discount factor. We trace the difference between our results and previous studies to the method used to estimate the model's parameters and the parameter values themselves. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.