AN EMPIRICAL-INVESTIGATION OF ASSET PRICING WITH TEMPORALLY DEPENDENTPREFERENCE SPECIFICATIONS

Using a Simulated Method of Moments approach, I evaluate a representat ive consumer asset pricing model in which the consumer is assumed to h ave time nonseparable preferences of several forms. Examining the mode l's implications for several moments of asset returns, I find evidence for the local substitution of consumption with habit formation occurr ing over longer periods of time. The interaction between these two eff ects is important. I also show that, when accounting for sampling erro r, a model with local substitution and long-run habit persistence is c onsistent with the Hansen and Jagannathan (1991) bounds.