Estimation and evaluation of asset pricing models with habit formation using Philippine data

Abstract

This study tests the habit-formation model, an extension of the consumption-based capital asset pricing model (C-CAPM). Using Philippine stock market data, seasonally adjusted and non-seasonally adjusted consumption datasets, the study tracks the performance of these resulting models in terms of forecast performance both in-sample and out-of-sample. Several statistical measures such as the Diebold–Mariano test and the success ratio test are used to compare these habit models against the standard power utility/C-CAPM, the random walk with drift model, and the traditional static CAPM. Based on the criteria set by this study, only the external habit model performs better than all the other models.

Acknowledgements

The author would like to thank Carlos C. Bautista and Joel Yu for their comments. They are not responsible for errors in this paper.