Proprietary Income, Entrepreneurial Risk and the Predictability of U.S. Stock Returns

Mathias Hoffmann

No 229, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: The paper contributes to a recent empirical and theoretical literature that suggests that proprietors are an important group of stockholders and that entrepreneurial risk could therefore help explain time-varying risk premia on the aggregate stock market. I use the intertemporal budget constraint of the average U.S. household to derive a cointegrating relationship between consumption and income from proprietary and non-proprietary wealth. I call this cointegrating relationship the cpy -residual. I interpret cpy as an entrepreneurial risk factor, because it mainly reflects cyclical fluctuations in proprietary income and because it is highly correlated with cross-sectional measures of idiosyncratic entrepreneurial risk. The cpy residual turns out to be a potent predictor of excess returns on the aggregate stock market in postwar U.S. data. However, this predictive power has started to decline since the beginning of the 1980s as stock market participation has widened with the advent of tax-deferable employer-sponsored pension plans and as proprietary income risk has become more easily diversifiable in the wake of state level bank deregulation

Keywords: Non-insurable background risk; entrepreneurial income; equity premium; long-horizon predictability; consumption risk sharing (search for similar items in EconPapers)
JEL-codes: E32 F37 G12 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-hrm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.wiso.uni-dortmund.de/lsfg/ae/en/content/research/research.html main text (text/html)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.wiso.uni-dortmund.de:80 (No such host is known. )
http://repec.org/sce2005/up.11673.1107113976.pdf (application/pdf)

Related works:
Working Paper: Proprietary Income, Entrepreneurial Risk, and the Predictability of U.S. Stock Returns (2006)
Working Paper: Proprietary Income, Entrepreneurial Risk, and the Predictability of U.S. Stock Returns (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:229

Access Statistics for this paper

More papers in Computing in Economics and Finance 2005 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().