Subjective Discounting, Habit Persistence And Asset Pricing

Starting from consumer behavior to explain the risk premium puzzle is a trend in recent years. By relaxing classic assumptions about consumer, traditional as-set pricing models have become more closer to reality, but these studies were fo-cused on relaxation of single hypothesis, ignoring the interaction between behavioral characteristics. However, most consumers are combinations of some non-ideal char-acteristics, and their decisions will naturally be the result of interaction of these characteristics, for example, habits formed by the past and the way of discounting generated by future consumption may incur "chemistry" on the consumer.This paper describes the equilibrium of a infinite-horizon and discrete-time exchange economy in which consumers with arbitrary subjective discount factors, habit persistence process and homothetic period utility follow linear Markov con-sumption and portfolio strategies. Explicit expressions are given for state prices and consumption-wealth ratios, and we make some explanation of how to make state price have large fluctuations with stable consumption increasing. Then we analyse the influences of some important parameters to competitive equilibrium, finding that subjective discount process and habit persistent process are correlated with each other. The influence to consumption-wealth ratios of one factor depends on the set of the other one. In addition, the existence of equivalent models implies that the traditional β-models and the principle of revealed preferences may be inefficient.