Sentiment or habits: Why not both?

Abstract Habits and sentiment are important psychological behaviors in asset pricing. In this article I nest consumer as a risk factor into the Campbell–Cochrane (CC) habit model examine its impact on prices. The provides an economic mechanism for pricing of through sensitivity equilibrium levels but finds market price much lower than fundamentals. additional does not improve CC model, with both models returning matched moments error from 1980Q1 to 2021Q4. factor, however, subsumes aversion resulting coefficient without sentiment. Furthermore, shows that during COVID period, premium was driven more by consumption growth