Consumption, Aggregate Wealth and Expected Stock Returns: An FCVAR Approach

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Ricardo Quineche
Keyword(s):  
Stock Returns ◽  
General Framework ◽  
Estimation Procedure ◽  
Zero Order ◽  
Labor Income ◽  
First Order ◽  
Long Run ◽  
Expected Stock Returns ◽  
Aggregate Wealth ◽  
Long Run Equilibrium

AbstractIn their seminal work, Lettau, M., and S. Ludvigson, 2001, “Consumption, Aggregate Wealth, and Expected Stock Returns.” The Journal of Finance 56 (3): 815–49. https://doi.org/10.1111/0022-1082.00347, demonstrated that there exists a long-run relationship between consumption, asset holdings, and labor income. They denoted this relationship as cay and showed it to be quite successful in predicting the behavior of real stock returns. Their estimation procedure assumes that consumption, asset wealth, and labor income are first-order integrated (I(1), nonstationary) and that their linear combination forms a zero-order integrated (I(0), stationary) series. This paper proposes a more general framework in the estimation of the cay model by allowing both the series and the long-run equilibrium to be fractionally integrated. We use the recently developed Fractionally Cointegrated VAR (FCVAR) approach to estimate the cay model. Results show that: (i) the series are nonstationary but mean-reverting processes, (ii) there exists a long-run equilibrium between consumption, asset wealth, and labor income, (iii) this long-run relationship is a stationary fractionally integrated process, and (iv) the estimated cay using the FCVAR approach shows the same desirable forecasting properties as its predecessor.

Consumption, aggregate wealth and expected stock returns: a quantile cointegration approach

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Ricardo Quineche
Keyword(s):  
Stock Returns ◽  
The United States ◽  
Labor Income ◽  
Left Tail ◽  
Long Run ◽  
Short Run ◽  
Excess Stock Returns ◽  
Aggregate Wealth ◽  
Risk Free Rate ◽  
The Right

Abstract This paper empirically examines the long-run relationship between consumption, asset wealth and labor income (i.e., cay) in the United States through the lens of a quantile cointegration approach. The advantage of using this approach is that it allows for a nonlinear relationship between these variables depending on the level of consumption. We estimate the coefficients using a Phillips–Hansen type fully modified quantile estimator to correct for the presence of endogeneity in the cointegrating relationship. To test for the null of cointegration at each quantile, we apply a quantile CUSUM test. Results show that: (i) consumption is more sensitive to changes in labor income than to changes in asset wealth for the entire distribution of consumption, (ii) the elasticity of consumption with respect to labor income (asset wealth) is larger at the right (left) tail of the consumption distribution than at the left (right) tail, (iii) the series are cointegrated around the median, but not in the tails of the distribution of consumption, (iv) using the estimated cay obtained for the right (left) tail of the distribution of consumption improves the long-run (short-run) forecast ability on real excess stock returns over a risk-free rate.

Consumption, Aggregate Wealth, and Expected Stock Returns

CFA Digest ◽  
2002 ◽  
Vol 32 (1) ◽  
pp. 52-53
Author(s):  
Johann U. de Villiers
Keyword(s):  
Stock Returns ◽  
Expected Stock Returns ◽  
Aggregate Wealth

scholarly journals Consumption, Aggregate Wealth, and Expected Stock Returns

2001 ◽  
Vol 56 (3) ◽  
pp. 815-849 ◽  
Author(s):  
Martin Lettau ◽  
Sydney Ludvigson
Keyword(s):  
Stock Returns ◽  
Expected Stock Returns ◽  
Aggregate Wealth

scholarly journals PENGARUH HUMAN CAPITAL (LABOR INCOME) TERHADAP EXPECTED STOCK RETURNS

2018 ◽  
Vol 12 (1) ◽  
pp. 58-79
Author(s):  
Caecilia Atmini Susilandari
Keyword(s):  
Human Capital ◽  
Asset Pricing ◽  
Stock Returns ◽  
Stock Return ◽  
Idiosyncratic Risk ◽  
Labor Income ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Industry Level ◽  
Expected Stock Returns

This research intended to analyse the use of premium as the proxy of human capital (labor income) in the industry level as one of the factors to measure the expected stock returns other than market, smb, hml, umdand liquidity variable that can be applied in Indonesia.The analysis coveres the human capital (labor income) in the industry level to cross section of stock return and the effect of human capital (labor income) to idiosyncratic risk in the asset pricing model. It usesincome percapita to measure the premium variabel in the period of 2001 – 2011 and 30 stocks portfolio chosen based on the biggest market capitalization value in six sector in the period of 2001 – 2011

scholarly journals Inflation, Output, And Stock Prices: Evidence From Brazil

2011 ◽  
Vol 18 (1) ◽  
Author(s):  
Bahram Adrangi ◽  
Arjun Chatrath ◽  
Antonio Z. Sanvicente
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Economic Activity ◽  
Negative Relationship ◽  
The Real ◽  
Price Levels ◽  
Long Run ◽  
Inflation Rates ◽  
Cointegration Tests ◽  
Long Run Equilibrium

<p class="MsoNormal" style="text-align: justify; margin: 0in 40.5pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">Research in economics and finance documents a puzzling negative relationship between stock returns and inflation rates in markets of industrialized economies.<span style="mso-spacerun: yes;">&nbsp; </span>The present study investigates this relationship for Brazil. We show that the negative relationship between the real stock returns and unexpected inflation persists after purging inflation of the effects of the real economic activity.<span style="mso-spacerun: yes;">&nbsp; </span>The Johansen and Juselius cointegration tests verify a long-run equilibrium between stock prices, general price levels, and the real economic activity. Furthermore, stock prices and general price levels also show a strong long-run equilibrium with the real economic activity and each other.<span style="mso-spacerun: yes;">&nbsp;&nbsp; </span>The findings lend support to Fama&rsquo;s proxy hypothesis in the long-run.</span></span></span></p>

Long-run expected stock returns

2021 ◽  
Author(s):  
Paul G. Geertsema ◽  
Helen Lu
Keyword(s):  
Stock Returns ◽  
Long Run ◽  
Expected Stock Returns

The Short-Run and Long-Run Components of Idiosyncratic Volatility and Stock Returns

2021 ◽  
Author(s):  
Yunting Liu
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Systematic Risk ◽  
Risk Exposure ◽  
Idiosyncratic Volatility ◽  
Growth Options ◽  
Long Run ◽  
Expected Stock Returns ◽  
Short Run ◽  
Systematic Risk Factors

To capture the dynamics of idiosyncratic volatility of stock returns over different horizons and investigate the relationship between idiosyncratic volatility and expected stock returns, this paper develops and estimates a parsimonious model of idiosyncratic volatility consisting of a short-run and a long-run component. The conditional short-run and long-run components are found to be positively and negatively related to expected stock returns, respectively. The positive relation between the short-run component and stock returns may be caused by investors requiring compensation for bearing idiosyncratic volatility risk when facing trading frictions and hold underdiversified portfolios. The negative relationship between the long-run component and stock returns may reflect the fact that stocks with high long-run idiosyncratic volatility are less exposed to systematic risk factors and, hence, earn lower returns. Moreover, the low-risk exposure of stocks characterized by high idiosyncratic volatility lends support to real-option-based mechanisms to explain this negative relation. In particular, the systematic risk of a firm with abundant growth options crucially depends upon the risk exposure of these options. The value of growth options could rise significantly because of convexity when the increase in idiosyncratic volatility occurs over long horizons. And growth options’ systematic risk could fall because the relative magnitude of their value in relation to systematic risk factors decreases. This paper was accepted by David Simchi-Levi, finance.

Drivers of stock returns

2021 ◽  
pp. 49-58
Author(s):  
Jesper Rangvid
Keyword(s):  
Stock Returns ◽  
Relative Importance ◽  
First Order ◽  
Long Run

This chapter demonstrates how we can decompose stock returns into three underlying ‘drivers’:Yield, growth, and valuation change.The chapter also examines the relative importance of each driver for stock returns.It shows that changes in valuations contribute only little to stock returns over very long horizons, but are of first-order importance for stock returns over shorter horizons. This insight will be important when we in Part V deal with expectations to future stock returns.When valuation changes cancel out in the long run, long-run returns will be given as the sum of the first two components. In simple terms, in the long run, stock returns are ‘yield plus growth’.

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