External Habits Research Articles

Awareness of malocclusion and attitude towards orthodontic treatment among trainee dental surgery technicians in Nigeria

Objective: Malocclusion affects aesthetics, the physical, psychological and social life of a person. The aim of this study was to evaluate the awareness of malocclusion and attitude towards orthodontic treatment among trainee dental surgery technicians in Nigeria.
 Materials and Methods: This was a descriptive cross-sectional study carried out among 68 final year (sixty-eight) trainee dental surgery technicians in Nigeria. The research instrument was a self-administered close ended questionnaire. Data was analyzed using SPSS version 20. P value (P<0.05) was regarded as significant.
 Results: Sixty-one (89.7%) of the respondents were females, while 7 (10.3%) were males. Fifty-seven (83.8%) have heard of the term malalignment of teeth, 53 (77.9%) of the students think malalignment is due to external habits. 61 (89.7%) are aware that few teeth may have to be removed for proper positioning of irregular teeth and 51 (75.0%) were aware that the irregular teeth can be corrected even after 40 years of age. More females were aware of malocclusion and had positive attitude towards orthodontic procedures when compared to the males, but the difference was not statistically significant (P>0.05).
 Conclusion: Majority of the respondents in this study were aware of the term malalignment and had positive attitude towards orthodontic treatment. More females constituted the study population.

Equity Premium with Habits, Wealth Inequality and Background Risk

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles.

External Habits Formation and the Environment

Abstract The present paper presents a standard overlapping generations model with external habits formation and environmental quality in the utility function. Our main objective is to study the impact of external habits on capital accumulation and environmental quality on the intertemporal competitive equilibrium. We notice that striving for status leads to environment worsening and capital increasing when the cohort size is large.

ANTICIPATED FUTURE CONSUMPTION IN AN ENDOGENOUS GROWTH MODEL

We devise an endogenous growth model in which agents’ utility depends not only on current consumption but also on the pleasure of anticipated future consumption. We consider the case in which agents derive satisfaction from their own anticipatory feelings—inward-looking or internal anticipation—and the case in which agents derive utility from anticipation of other people’s future consumption—outward-looking or external anticipation. We characterize the effects of introducing a forward-looking consumption reference on the dynamics of the economy. Whereas the inward-looking economy features transitional dynamics, the outward-looking economy does not. The distortions caused by the externality in the economy with external habits can be corrected by subsidizing income at a time-varying rate or by means of a tax on consumption at a decreasing rate. We contrast the equilibrium dynamics of our specification to the more standard specification of the habit formation consumption reference point. Numerical simulations supplement the theoretical analysis.

Optimal emissions tax rates under habit formation and social comparisons

The existing climate models ignore the behavioral anomalies of households and conclude that the optimal environmental tax rate should comove with business cycles. However, this assumption has received extensive criticism recently. To this end, this paper studies the optimal emissions tax rate when households are bounded rational. In particular, we calculate the optimal climate policy in a dynamic stochastic general equilibrium (DSGE) model that features households with habit formation (internal habits) and social comparisons (external habits). Compared to the benchmark model without consumption externality, the social comparisons model amplifies consumption volatility but produces a similar response of pollutant emissions in the presence of the three types of economic shocks considered. In contrast, the habit formation model decreases the volatility of both consumption and pollutant emissions. In contrast to the previous result that the optimal emissions tax rate should be procyclical, we find that the social comparisons model largely mitigates the procyclicality of optimal emissions tax rates, and the optimal emissions tax rates under the habit formation model remain constant in response to all the economic shocks considered.

Real and Nominal Equilibrium Yield Curves

This paper quantitatively explores the role of external habits, nominal rigidities, and monetary policy for real and nominal bond yields in an asset-pricing endogenous growth model. The calibration captures the reported average positive slopes of U.S. real and nominal yield curves with sizable positive real and nominal bond risk premia. Habits are critical to generate positive real premia by altering the comovement of real rates and productivity shocks. Nominal rigidities generate monetary policy effects on real bonds. Stronger policy rule inflation responses or weaker output responses increase real term premia and reduce inflation risk premia. Relative to standard models, the paper provides an alternative interpretation of real and nominal bond risks. This paper was accepted by Tomasz Piskorski, finance.

Fundamental Sources of the Time Variation in Equity Risk Levels

I propose an asset-pricing model with preference shocks and contemporaneous cash-flow risk that can explain key asset-pricing patterns related to business cycle. In this consumption-based model with preference shocks, contemporaneous cash-flow risk of equities drives the cross section of risk premia in bad times, i.e. during periods with a high recession probability, relatively more than in good times. This model makes new predictions about the conditional relevance of cash flow risk for asset prices that are confirmed in data. Unlike in models with external habits or long-run risks, a model with preference shocks correlated with business-cycle shocks further implies that reasonable quantities of contemporaneous cash-flow risk have a significant effect on conditional risk premia of assets and return volatility.

Habits, Wealth and Equity Risk Premium

We investigate how external habits affect the equity risk premium in an exchange economy with identical agents, except for their initial endowment. Wealth inequality is introduced with a mean-preserving transfer of endowment. We show that, when external habits are present and the absolute risk tolerance of agents is convex (concave), wealth inequality will decrease (increase) the equity risk premium. Furthermore, we find that as external habits increase, the equity risk premium increases (decreases) if agents exhibit convex (concave) absolute risk tolerance.

Option-Implied Price of Risk

I use index prices and options to estimate the pricing kernel's elasticity, which equals the market price of risk. I show that my estimate predicts future market returns, is priced in a cross-sectional analysis, and that it is highly correlated to business cycle variables. Building on the external habits model of Campbell and Cochrane (1999), I rationalize my results by assuming a time-varying relationship between consumption growth and market returns, and therefore introduce a new way of estimating the latent surplus consumption ratio without using problematic consumption data. My results provide novel empirical support for consumption-based asset pricing models.

Habit formation or word of mouth: What does lagged dependent variable in tourism demand models imply?

The effects of habit formation/persistence (HFP) and word of mouth (WOM) each play a critical role in influencing tourists’ decisions regarding whether to visit tourism destinations and therefore tourism policies and tourism management resource allocations. Nevertheless, in previous tourism demand studies, the two effects have been represented by the same time-lagged dependent variable, which makes the variable have an ambiguous meaning and biases the empirical results. The purpose of this study is to solve the ambiguity of a lagged dependent variable in tourism demand. We used economic theories regarding internal habits and external habits to clarify the meanings of HFP and WOM and revised the tourism demand model into a spatial dynamic panel model (SDPM). The empirical results suggested that an SDPM is a more accurate model for modeling tourism demand. The effects of variables in an SDPM are more consistent with theoretical expectations.

Consumption externalities and growth: Theory and evidence for the United States

Abstract We study a series of growth models in which households’ preferences display ‘jealousy’ or ‘external habits’: a negative dependence on average consumption. We argue that accounting for consumption externalities in growth models requires consideration of both their static and dynamic effects. In a static sense, and as highlighted in the literature, individual households do not internalize the effect of their choices on average consumption. In a dynamic sense, and differently from most of the literature, households do not take into account the effect of changes in average consumption on the evolution of the (shadow-) value of their own wealth. Accordingly, the equilibrium paths of fully endogenous growth models involve inefficiently low savings and growth because of external habits. In semi-endogenous models, consumption externalities have no growth effects but rather level effects on the long-run research intensity. In exogenous growth models, externalities only slow down the convergence to balanced growth. We then use Consumer Expenditure Survey data to test the extent of external habits: our identification relies on a two-stage estimator that uses the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1993 as positive and negative consumption shocks to US top incomes, respectively. In the first stage, we use a difference-in-difference approach to exploit the exogenous variation in consumption due to federal tax reform. We then use the predicted values for average within-cohort consumption by income deciles as an instrument to estimate the extent of social preferences in an estimator that is directly comparable with the household policy function implied by our benchmark model. We find highly significant, long-run external effects ranging from 17% to 27%, depending on the model specification. We also find that consumption externalities are not statistically significant at the very top of the income distribution: this finding provides a rationale for saving rates increasing with incomes, and suggests a channel through which income inequality reverberates into wealth inequality.

Welfare Implications of Asset Pricing Facts: Should Central Banks Fill Gaps or Remove Volatility?

The welfare cost of economic uncertainty has a term structure that is a simple transformation of the term structures of the equity premium and interest rates. Twenty years of financial market data suggest a term structure of welfare costs that is downward-sloping on average, especially during downturns. This evidence offers guidance in selecting a model to study the benefits of macroeconomic stabilization from a structural perspective. A model with nominal rigidities and nonlinear external habits can rationalize the evidence, and it implies that the competitive volatility of consumption is inefficient. The model is observationally equivalent in its quantity implications to a standard New Keynesian model with CRRA utility but the optimal policy prescription is overturned. In the model the central bank should focus on removing consumption volatility (a targeting of risk premia) rather than on filling the gap between consumption and its flexible-price counterpart (inflation targeting).

Habit Formation Heterogeneity: Implications for Aggregate Asset Pricing

Nous résolvons explicitement dans cet article le problème d’évaluation des prix agrégés des actifs dans une économie à la Lucas, en équilibre général et à temps discret, où deux agents ont des préférences différentes en terme d’aversion au risque et de sensibilité à la modification de leurs habitudes additives. On distingue même, sur ce dernier point, la dimension interne – la persévérance des habitudes, de la dimension externe à savoir la tendance à rivaliser avec ses voisins. Pour résoudre le modèle, nous généralisons l’algorithme de Dumas et Lyasoff (2012) de manière à prendre en compte des préférences intertemporelles non séparables. Nos résultats numériques montrent que la dimension interne des habitudes contribue plus que la dimension externe à expliquer les valeurs observées historiquement de la prime de risque action aux États-Unis, de la volatilité des actions américaines, du ratio de Sharpe et enfin du niveau et de la volatilité du taux d’intérêt sans risque.

Keeping Up with the Joneses: Other-Regarding Preferences and Endogenous Growth

We study a series of growth models in which households' preferences display `jealousy' or `external habits': a negative dependence on average consumption. We argue that accounting for consumption externalities in growth models requires consideration of both their static and dynamic effects. In a static sense, and as highlighted in the literature, individual households do not internalize the effect of their choices on average consumption. In a dynamic sense, and differently from most of the literature, households do not take into account the effect of changes in average consumption on the evolution of the (shadow-) value of their own wealth. Accordingly, the equilibrium paths of fully endogenous growth models involve inefficiently low savings and growth because of external habits. In semi-endogenous models, consumption externalities have no growth effects but rather level effects on the long-run research intensity. In exogenous growth models, externalities only slow down the convergence to balanced growth. We then use Consumer Expenditure Survey data to test the extent of external habits: our identification relies on a two-stage estimator that uses the Tax Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1993 as positive and negative consumption shocks to US top incomes, respectively. In the first stage, we use a difference-in-difference approach to exploit the exogenous variation in consumption due to federal tax reform. We then use the predicted values for average within-cohort consumption by income deciles as an instrument to estimate the extent of social preferences in an estimator that is directly comparable with the household policy function implied by our benchmark model. We find highly significant, long-run external effects ranging from 17\% to 27\%, depending on the model specification. We also find that consumption externalities are not statistically significant at the very top of the income distribution: this finding provides a rationale for saving rates increasing with incomes, and suggests a channel through which income inequality reverberates into wealth inequality.

A Unified Theory of Asset Pricing

In this paper, we propose a general methodology to characterize (i.e. develop the recursive equation systems for) the dynamic stochastic general equilibrium asset pricing problems (DSGE) with arbitrary numbers of agents and financial assets in a Lucas economy and propose a convergent numerical method to solve the equation systems. Potentially, we can introduce arbitrary market structures, frictions or other exotic settings in agents' optimization problems, such as incomplete market, portfolio constraint, transaction cost, price impact, heterogeneous beliefs, habit formation, generalized recursive preferences, long run risks, idiosyncratic risk, rare disasters, ambiguity aversion, Knightian uncertainty, information asymmetry or some behavioral finance features, such as non-concave utility functions or probability distortions. In particular, we apply our method to three related theoretical asset pricing problems in the DSGE framework: asset pricing with complete market, or incomplete market, heterogeneous beliefs and external habits or generalized recursive preferences and portfolio constraints. A novel convergent numerical technique is proposed, which is based on convergent function approximation (e.g., machine learning function approximation via artificial neural networks). The numerical method introduced is powerful and can be applied to problems of high dimensions and extended to all types of the backward stochastic differential equations or partial differential equations in the literature. With the help of machine learning function approximation, we are able to accurately find the numerical solution of a DSGE or a partial equilibrium asset pricing problem in a future time-space grid. Machine learning technique is also combined with traditional stochastic differential equations with jumps to model the underlying asset prices, which opens the door to a completely new modeling field and therefore gives classical stochastic finance theory a new life. In the end, some forward-looking thoughts in financial modeling are provided. Numerical experiments are carried out and the solutions are analyzed.

Asset Prices and Risk Sharing in Open Economies

This paper proposes a two-good, two-country general equilibrium model with external habits and home-biased preferences that addresses a number of international …nance puzzles. Speci…cally, the model reconciles the high degree of international risk sharing implied by relatively smooth exchange rates with the modest cross-country consumption growth correlations seen in the data, resolving the Brandt, Cochrane and Santa-Clara (2006) puzzle. Furthermore, the model matches the empirically observed low correlation between exchange

Internal habits in an endogenous growth model with elastic labor supply

This paper studies the implications of introducing internal versus external habits in an endogenous growth model with elastic labor supply. We first show that the comparative-static effects of a shock in habits parameters are qualitatively different depending on how habits are specified. An increase in the weight of habits in utility raises long-run growth and labor supply in the external-habits model, whereas it reduces labor supply and has an ambiguous effect on long-run growth in the internal-habits model. Increasing the speed of adjustment of habits to current consumption has no effect on long-run values with external habits, but has a negative effect on long-run growth and labor supply with internal habits. Numerical simulations reveal that the qualitative differences are also quantitatively important. Finally, we illustrate the dynamic effects of an increase in productivity. On impact and in the long-run this shock has a positive effect on growth, labor supply and the savings rate in both models. However, along the transition labor supply exhibits a procyclical response to the productivity increase in the internal-habits model, but a countercyclical response in the external-habits model. These results could be helpful on the still open debate on whether habits are internally or externally formed.

Real business-cycle model with habits: Empirical investigation

This paper empirically investigates the ability of a real business-cycle model with nonseparabilities in consumption and leisure and external habits both in consumption and leisure to fit the postwar US data. The results indicate a strong but fast-dying habit in leisure, and a somewhat weaker but more persistent habit in consumption. Intratemporal nonseparabilities in consumption and leisure play an important role in driving the response of real variables to a productivity shock. Adding capital adjustment costs to the model with nonseparabilities in consumption and leisure and external habits both in consumption and leisure changes the responses of real variables to a productivity shock, however, in a way similar to that documented for the models with capital adjustment costs and habit formation in consumption. The estimated persistence of the productivity shock is quite modest, which may be the factor that drives a procyclical response of hours worked to the positive productivity shock even when habit in consumption is strong.

Testing the Optimality of Consumption Decisions of the Representative Household: Evidence from Brazil

This paper investigates whether there is a fraction of consumers that do not behave as fully forward-looking optimal consumers in the Brazilian economy. The generalized method of moments technique was applied to nonlinear Euler equations of the consumption-based capital assets model contemplating utility functions with time separability and non-separability. The results show that when the household utility function was modeled as constant relative risk aversion, external habits and Kreps-Porteus, estimates of the fraction of rule-of-thumb households was, respectively, 89%, 78% and 22%. According to this, a portion of disposable income goes to households who consume their current incomes in violation of the permanent income hypothesis.

Efficient bond price approximations in non-linear equilibrium-based term structure models

AbstractThis paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.