This work develops an external habit model of the equity premium subject to long run risk in continuous time. The solution to this model is an analytic price-dividend function of the surplus consumption ratio and the long run risk variable. As a result, the equity premium can be accurately...

Analytic methods for solving asset pricing models are developed to solve asset pricing models. Campbell and Cochrane's [1999. By force of habit, a consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205-251] habit persistence model provides a...