Wealth, Labour Income, Stock Returns and Government Bond Yields, and Financial Stress in the Euro Area

Sousa, Ricardo

Wealth, Labour Income, Stock Returns and Government Bond Yields, and Financial Stress in the Euro Area

No 22/2011, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: I show that when the ratio of asset wealth to human wealth falls, investors become more exposed to idiosyncratic shocks and demand higher stock and government bond risk premia. I find that the residuals from the cointegrating vector among asset wealth and labour income, wy, predict both future stock and bond returns in the Euro Area. Consequently, it can be used to track time-variation in risk premium. The results are robust to the inclusion of control variables and vis-a-vis other benchmark models. Finally, I show that, conditioning the predictive ability of wy on the financial stress conditions allows one to track better future time-variation in risk premium. Moreover, when financial stress increases, investors perceive a larger risk for both stocks and government bonds.

Keywords: wealth; income; stock returns; government bond yields (search for similar items in EconPapers)
JEL-codes: D12 E21 E44 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-eec and nep-mac
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