Wealth-to-income ratio and stock returns: evidence from the Euro Area

Ricardo Sousa

Applied Economics Letters, 2012, vol. 19, issue 7, 619-622

Abstract: I find that when the ratio of asset wealth to human wealth falls, investors become more exposed to labour income shocks and demand a higher risk premium for stocks. I show that the residuals of the trend relationship among wealth and labour income, wy , predict future stock returns in the Euro Area. The results are robust to additional control variables and show the superiority of wy vis-a-vis other benchmark models.

Date: 2012
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DOI: 10.1080/13504851.2011.591723

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