Type

Journal Article

Authors

Jeremy Rudd
Karl Whelan

Subjects

Economics

Topics
economic forecasting budget consumption cointegration return forecastability e21 budget constraint cay

Empirical proxies for the consumption–wealth ratio (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.
Collections Ireland -> University College Dublin -> School of Economics
Ireland -> University College Dublin -> College of Social Sciences and Law
Ireland -> University College Dublin -> Economics Research Collection

Full list of authors on original publication

Jeremy Rudd, Karl Whelan

Experts in our system

1
Karl Whelan
University College Dublin
Total Publications: 69