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Can the seasonal pattern of consumption growth reproduce habits in the cross-section of stock returns? Evidence from the European equity market

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  • Javier Rojo-Suárez
  • Ana Belén Alonso-Conde
  • Ricardo Ferrero-Pozo

Abstract

This paper examines the prevalence for Europe of some well-documented seasonal patterns in consumption data, which allow classic consumption-based asset pricing models to omit an explicit habit specification. We use the Campbell-Cochrane habit model as a reference, proxying habit persistence by the serial correlation of consumer sentiment. Our results show that consumption data for the third and fourth quarters allow the classic power utility function to perform very similarly to the Campbell-Cochrane model, while the serial correlation of consumer sentiment helps improve the explanatory power of habits.

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  • Javier Rojo-Suárez & Ana Belén Alonso-Conde & Ricardo Ferrero-Pozo, 2021. "Can the seasonal pattern of consumption growth reproduce habits in the cross-section of stock returns? Evidence from the European equity market," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 721-739, May.
    • Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:721-739
    DOI: 10.1080/1351847X.2020.1838936
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    Cited by:

    1. Galicia-Sanguino, Lucía & Rojo-Suárez, Javier & Alonso-Conde, Ana B. & López-Pérez, M. Victoria, 2021. "Trade integration and research and development investment as a proxy for idiosyncratic risk in the cross-section of stock returns," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).

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