Collateralizable Wealth, Asset Returns, and Systemic Risk: International Evidence

Ricardo Sousa

No 15/2010, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.

Keywords: stock returns; government bond yields; systemic crises. (search for similar items in EconPapers)
JEL-codes: D12 E21 E44 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (5)

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