The Wealth-Consumption Ratio: A Litmus Test for Consumption-Based Asset Pricing Models

Stijn Van Nieuwerburgh and Hanno Lustig

No 398, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: The volatility of the price-dividend ratio on stocks, the predictability of stock returns, and the lack of predictability in dividend growth are commonly interpreted as evidence of substantial time-variation in risk premia. We construct the wealth-consumption ratio for the U.S., the price-dividend ratio on total wealth. We show that it is at least five times less volatile than the price-dividend ratio on stocks. The wealth-consumption ratio encodes information about conditional market prices of risk, and hence about asset prices. Matching its properties is a litmus test for consumption-based asset pricing models. Models that match the predictability of equity returns impute too much predictability to total wealth returns and hence too much volatility to the wealth-consumption ratio, because they rely on time variation in the risk premium on total wealth. The smoothness of the wealth-consumption ratio suggests that there may be less time-variation in market prices of risk than commonly inferred from equity prices alone.

Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2007/paper_398.pdf (application/pdf)

Related works:
Working Paper: The Wealth-Consumption Ratio: A Litmus Test for Consumption-based Asset Pricing Models¤ (2007)
Working Paper: The Wealth-Consumption Ratio: A Litmus Test for Consumption-based Asset Pricing Models
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:red:sed007:398

Access Statistics for this paper

More papers in 2007 Meeting Papers from Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().