| Sumario: | Using a Simulated Method of Moments approach, I evaluate a representative consumer asset pricing model in which the consumer is assumed to have time nonseparable preferences of several forms. Examining the model's implications for several moments of asset returns, I find evidence for the local substitution of consumption with habit formation occurring over longer periods of time. The interaction between these two effects is important. I also show that, when accounting for sampling error, a model with local substitution and long-run habit persistence is consistent with the Hansen and Jagannathan (1991) bounds. Reprinted by permission of the Econometric Society.
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