Consumption, Wealth, Stock and Government Bond Returns: International Evidence

Antonio Afonso and Ricardo Sousa

No 2011/09, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: In this paper, we show, from the consumer’s budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth, and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signalling a future rise in taxes, then they will temporarily reduce their consumption.

Keywords: consumption; wealth; stock returns; bond returns. (search for similar items in EconPapers)
JEL-codes: D12 E21 E44 (search for similar items in EconPapers)
Date: 2011-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: CONSUMPTION, WEALTH, STOCK AND GOVERNMENT BOND RETURNS: INTERNATIONAL EVIDENCE (2011)
Working Paper: Consumption, Wealth, Stock and Government Bond Returns: International Evidence (2011)
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