Spanish Economic Review

, Volume 8, Issue 3, pp 199–226

The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex

Regular Article

Abstract

This paper addresses new insights into the predictability of financial returns. In particular, we analyze two aspects of the controversial forecasting literature. On the one hand, we demonstrate a positive and contemporaneous link between aggregate book/market and consumption/wealth ratios. On the other hand, we show that real estate and human capital, as the present value of all future salaries, are key components of the consumption/wealth ratio in Spain. Specifically, we find that the cointegrating residuals of consumption, asset holdings, real estate holdings, and our measure of human capital provide a better forecast of future returns than does the standard proxy of the consumption/wealth ratio. This result is important because it clarifies the importance of country-specific components of wealth for cases in which the consumption/wealth ratio is employed as an instrument in conditional asset pricing models.

Keywords

Stock markets Predictability Consumption Aggregate wealth Book/market 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.Departamento de Economía Financiera Contabilidad y MarketingUniversidad de AlicanteAlicanteSpain
  2. 2.Departamento de Economía de la EmpresaUniversidad Carlos III de MadridMadridSpain

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