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
Online since: 2008-06-09T15:27:26Z
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
Journal: Review of Economic Dynamics
Volume: 9
Issue: 1
Start page: 34
End page: 51
Copyright (published version): Crown Copyright 2005 Published by Elsevier Inc.
Keywords: Budget constraintReturn forecastabilityCointegrationCay
Subject LCSH: Economic forecasting
DOI: 10.1016/j.red.2005.08.003
Other versions: http://dx.doi.org/10.1016/j.red.2005.08.003
Language: en
Status of Item: Peer reviewed
Appears in Collections:Economics Research Collection

Show full item record

Citations 20

Last Week
Last month
checked on Feb 19, 2019

Page view(s) 20

checked on May 25, 2018

Download(s) 20

checked on May 25, 2018

Google ScholarTM



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.