The Wealth-Consumption Ratio

Hanno Lustig, Stijn Van Nieuwerburgh and Adrien Verdelhan ()

No 13896, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We set up an exponentially affine stochastic discount factor model for bond yields and stock returns in order to estimate the prices of aggregate risk. We use the estimated risk prices to compute the no-arbitrage price of a claim to aggregate consumption. The price-dividend ratio of this claim is the wealth-consumption ratio. Our estimates indicate that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2 percent, substantially below the equity risk premium of 6.9 percent. As a result, the average US household has more wealth than one might think; most of it is human wealth. A large fraction of the variation in total wealth can be traced back to changes in long-term real interest rates. Contrary to conventional wisdom, we find that events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth.

JEL-codes: E21 G10 G12 (search for similar items in EconPapers)
Date: 2008-03
New Economics Papers: this item is included in nep-mac
Note: AP EFG IFM ME
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Citations: View citations in EconPapers (25)

Published as Rev Asset Pric Stud (2013) 3 (1): 38-94. doi: 10.1093/rapstu/rat002 First published online: April 11, 2013
Published as Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2013. "The Wealth-Consumption Ratio," Review of Asset Pricing Studies, vol 3(1), pages 38-94.

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Journal Article: The Wealth-Consumption Ratio (2013)
Working Paper: The Wealth-Consumption Ratio (2012)
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