Question: Consumption-based models of equity pricing, which include habits in consumption have been proposed by Abel (1990) and Campbell and Cochrane (1999). (a) What is the

Consumption-based models of equity pricing, which include habits in consumption have been proposed by Abel (1990) and Campbell and Cochrane (1999). (a) What is the specification of the utility function in each of these two models? How do their definitions of the habit in consumption differ? [10 marks]

(b)What is the stochastic discount factor in each of these two models? [5 marks]

(c) State and compare the no-arbitrage conditions for the two models for the case where the relevant variables are jointly log-normally distributed?

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