The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street

Hanno Lustig and Stijn Van Nieuwerburgh

No 11564, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-dge
Note: AP EFG
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Citations: View citations in EconPapers (22)

Published as Hanno Lustig & Stijn Van Nieuwerburgh, 2008. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 21(5), pages 2097-2137, September.

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