We econometrically estimate and test a consumption-based asset pricing model with stochastic internal habit. The model departs from existing deterministic internal habit models by introducing shocks to the coefficients in the distributed lag specification of consumption habit and consequently an...

We econometrically estimate a consumption-based asset pricing model with stochastic internal habit and test it using the generalized method of moments. The model departs from existing models with deterministic internal habit (e.g., Dunn and Singleton (1983), Ferson and Constantinides (1991), and...