The consumption/wealth and book/market ratios in a dynamic asset pricing contex

• Autores: Rosa Rodríguez, Belén Nieto Domenech
• Localización: Spanish economic review, ISSN 1435-5469, Vol. 8, Nº 3, 2006, págs. 199-226
• Idioma: inglés
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• Dialnet Métricas: 2 Citas
• Resumen

  • This paper addresses new insights into the predictability of financial returns. In particular, we analyze two aspects of the controversial forecasting literature. On the one hand, we demonstrate a positive and contemporaneous link between aggregate book/market and consumption/wealth ratios. On the other hand, we show that real estate and human capital, as the present value of all future salaries, are key components of the consumption/wealth ratio in Spain. Specifically, we find that the cointegrating residuals of consumption, asset holdings, real estate holdings, and our measure of human capital provide a better forecast of future returns than does the standard proxy of the consumption/wealth ratio. This result is important because it clarifies the importance of country-specific components of wealth for cases in which the consumption/wealth ratio is employed as an instrument in conditional asset pricing models.