Consumption, (Dis) Aggregate Wealth and Asset Returns

Ricardo Sousa

No 9/2005, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: In this work, we analyse the importance of disaggregation of wealth into main components (financial and housing wealth). We show, from the consumer´s intertemporal budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income (summarized by the variable cday) should help to predict U.K quarterly asset returns, and to provide better forecasts than a variable like cay from Lettan and Ludvigson (2001), which considers aggregate wealth instead. Using a sample for the U.K. for the period 1975:Q1 - 2003:Q4, we also find that: (i) financial wealth effects are significantly different from housing wealth efects; (ii) changes in financial wealth are mainly transitory, while changes in housing wealth are better understood as permanent; (iii) the relationship among consumption, (dis)aggregate wealth and labor income was relatively stable over time; (iv) consumption doesn´t react asymmetrically to positive and negative financial (or housing) wealth shocks.

Keywords: financial wealth; housing wealth; consumption; expected returns. (search for similar items in EconPapers)
JEL-codes: D12 E21 E44 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Consumption, (dis)aggregate wealth, and asset returns (2010)
Working Paper: Consumption, (Dis)Aggregate Wealth and Asset Returns (2006)
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