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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26323
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| Title: | The Wealth-Consumption Ratio: A Litmus Test for Consumption-based Asset
Pricing Models |
| Authors: | Lustig, Hanno
Nieuwerburgh, Stijn Van
Verdelhan, Adrien |
| Issue Date: | 23-Nov-2007 |
| Series/Report no.: | FIN-07-019 |
| Abstract: | We propose a new method to measure the wealth-consumption ratio, the
price-dividend ratio of a claim to aggregate consumption. It combines
no-arbitrage restrictions with data on bond yields and stock returns.
The estimated wealth-consumption ratio is much higher on average than
the price-dividend ratio on stocks and has lower volatility. This
implies that the consumption risk premium is substantially below the
equity risk premium, or that total wealth is less risky than stock
market wealth. Measuring the wealth-consumption ratio is important
because changes in the wealth-consumption ratio enter as a second asset
pricing factor besides consumption growth in the two leading
representative-agent asset pricing models, the external habit model and
the long-run risk model. The benchmark calibrations of these two asset
pricing models have dramatically different implications for the
wealth-consumption ratio, motivating our measurement exercise. |
| URI: | http://hdl.handle.net/2451/26323 |
| Appears in Collections: | Finance Working Papers
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