TY  - JOUR
AU  - Wachter,Jessica A.
TI  - Solving Models with External Habit
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11559
PY  - 2005
Y2  - August 2005
UR  - http://www.nber.org/papers/w11559
L1  - http://www.nber.org/papers/w11559.pdf
N1  - Author contact info:
Jessica Wachter
Department of Finance
2300 SH-DH
The Wharton School
University of Pennsylvania
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-7634
Fax: 215/898-6200
E-Mail: jwachter@wharton.upenn.edu
M2  - featured in NBER digest on 2005-08-22
AB  - Habit utility has been the focus of a large and growing body of literature in financial  economics. This study investigates ways of accurately and efficiently solving the Campbell and Cochrane (1999) external habit model.  Solutions for this model based on a grid of values for the state variable are shown to converge as the grid becomes increasingly fine. Convergence is substantially faster if the price-dividend ratio is computed as a series of ``zero-coupon equity'' claims rather than as the fixed-point of the Euler equation. Fitting the model to the term structure as well as to equity moments (as in Wachter (2005)) also results in faster convergence.
ER  -