This paper proposes a representative agent habit-formation model where preferences are defined for both luxury goods and basic goods. The model matches the equity risk premium, risk-free rate, and volatilities. From the intratemporal first-order condition, one can substitute out basic good...

We examine how long-run consumption risk arises endogenously in a standard production economy model where the representative agent has Epstein--Zin preferences. We show that even when technology growth is i.i.d., optimal consumption smoothing induces long-run risk--highly persistent variation in...