Empirical proxies for the consumption–wealth ratio

Files in This Item:
File Description SizeFormat 
whelank_article_post_041.pdf215.79 kBAdobe PDFDownload
Title: Empirical proxies for the consumption–wealth ratio
Authors: Rudd, Jeremy
Whelan, Karl
Permanent link: http://hdl.handle.net/10197/212
Date: 2006
Abstract: Using a log-linearized approximation to an aggregate budget constraint, it is possible to show that the ratio of consumption to total (human and non-human) wealth summarizes agents' expectations concerning both future labor income and future asset returns. In a series of recent papers, Lettau and Ludvigson construct an empirical analogue to the consumption–wealth ratio by approximating total wealth with a linear combination of labor income and observable non-human wealth. If valid, this framework suggests that consumption, assets, and labor income will be cointegrated. We demonstrate, however, that standard tests fail to reject the hypothesis of no cointegration once one employs measures of consumption, assets, and labor income that are jointly consistent with an underlying budget constraint. We also show that deviations of consumption, assets, and income from an estimated common trend are unable to predict future excess returns on stocks out of sample once theoretically consistent measures are used.
Type of material: Journal Article
Publisher: Elsevier Science
Copyright (published version): Crown Copyright 2005 Published by Elsevier Inc.
Keywords: Budget constraint;Return forecastability;Cointegration;Cay
Subject LCSH: Economic forecasting
Cointegration
Budget
DOI: 10.1016/j.red.2005.08.003
Language: en
Status of Item: Peer reviewed
Appears in Collections:Economics Research Collection

Show full item record

SCOPUSTM   
Citations 20

19
Last Week
0
Last month
checked on Jun 22, 2018

Page view(s) 20

153
checked on May 25, 2018

Download(s) 20

350
checked on May 25, 2018

Google ScholarTM

Check

Altmetric


This item is available under the Attribution-NonCommercial-NoDerivs 3.0 Ireland. No item may be reproduced for commercial purposes. For other possible restrictions on use please refer to the publisher's URL where this is made available, or to notes contained in the item itself. Other terms may apply.