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Working Paper, No. 1997-04, 1997
Habit Persistence and Asset Returns in an Exchange Economy

The authors examine asset prices and returns in the context of a version of the pure exchange economy studied in Lucas (1978) and Mehra and Prescott (1985). Their purpose is to identify the key channels by which changes in preferences affect the equity premium and the risk-free rate and to develop intuition that is useful for understanding asset pricing the more complicated economies.

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