Spanish Economic Review

, Volume 8, Issue 3, pp 199–226 | Cite as

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

  • Belén Nieto
  • Rosa RodríguezEmail author
Regular Article


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.


Stock markets Predictability Consumption Aggregate wealth Book/market 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Amihud Y, Hurvich C (2004) Predictive regressions: a reduced-bias estimation method. J Financ Quant Anal 39:813–841CrossRefGoogle Scholar
  2. Black F (1993) Return and beta. J Portf Manage 20:8–18Google Scholar
  3. Brennan M, Xia Y (2002) Tay’s as good as Cay. Anderson School of Management, University of California, Los AngelesGoogle Scholar
  4. Breusch T (1978) Testing for autocorrelation in dynamic linear models. Aust Econ Pap 17:334–355CrossRefGoogle Scholar
  5. Campbell J (1993) Intertemporal asset pricing without consumption data. Am Econ Rev 83:487–512Google Scholar
  6. Campbell J (1996) Understanding risk and return. J Polit Econ 104:298–345CrossRefGoogle Scholar
  7. Campbell J, Shiller R (1988) The dividend-price ratio and expectations of future dividends and discount factors. Rev Finance Stud 1:195–228CrossRefGoogle Scholar
  8. Capaul C, Rowley I, Sharpe W (1993) International value and growth stock returns. Finance Anal J 49:27–36CrossRefGoogle Scholar
  9. Casals J, Jerez M, Sotoca S (2004) Empirical modeling of time series sampled at different frequencies. Working Paper, Universidad Complutense, MadridGoogle Scholar
  10. Chan L, Hamao Y, Lakonishok J (1991) Fundamentals and stock returns in Japan. J Finance 46:1739–1764CrossRefGoogle Scholar
  11. Chan L, Jegadeesh N, Lakonishok J (1995) Evaluating the performance of value versus glamour stocks: the impact of selection bias. J Finance Econ 38:269–296CrossRefGoogle Scholar
  12. Cochrane J (2001) Asset pricing. Princeton University Press, New JerseyGoogle Scholar
  13. Cohen R, Polk C, Vuolteenaho T (2001) The value spread. Working Paper no. 8242. National Bureau of Economic ResearchGoogle Scholar
  14. Daniel K, Titman S (1997) Evidence on the characteristics of cross sectional variation in stock returns. J Finance 52:1–33CrossRefGoogle Scholar
  15. Davis J (1994) The cross-section of realized stock returns: the pre-COMPUSTAT evidence. J Finance 49:1579–1593CrossRefGoogle Scholar
  16. Davis JL, Fama EF, French KR (2000) Characteristics, covariances, and average returns: 1929 To 1997. J Finance 55:389–406CrossRefGoogle Scholar
  17. DeBondt W, Thaler R (1987) Further evidence on investor overreaction and stock market seasonality. J Finance 42:557–581CrossRefGoogle Scholar
  18. Fama E, French K (1988a) Permanent and temporary components of stock prices. J Polit Econ 96:246–273CrossRefGoogle Scholar
  19. Fama E, French K (1988b) Dividend yields and expected stock returns. J Finance Econ 22:3–26CrossRefGoogle Scholar
  20. Fama E, French K (1993) Common risk factors in the returns on stocks and bonds. J Finance Econ 33:3–56CrossRefGoogle Scholar
  21. Fama E, French K (1996) Multifactor explanation of asset pricing anomalies. J Finance 51: 55–84CrossRefGoogle Scholar
  22. Fama E, French K (1998) Value versus growth: the international evidence. J Finance 53:1975–1999CrossRefGoogle Scholar
  23. Feltham D, Ohlson J (1995) Valuation and clean surplus accounting for operating and financial activities. Contemp Account Res Spring:689–731CrossRefGoogle Scholar
  24. Gao P, Huang K (2002) Aggregate consumption/wealth ratio: does it work internationally? Federal Reserve Bank of Kansas City, at Scholar
  25. Hodrick R (1992) Dividend yields and expected stock returns: alternative procedures for influence and measurement. Rev Finance Stud 5:357–386CrossRefGoogle Scholar
  26. Hodrick R, Zhang X (2001) Evaluating the specification errors of asset pricing models. J Finance Econ 62:327–376CrossRefGoogle Scholar
  27. Jagannathan R, Wang Z (1996) The conditional CAPM and the cross-section of expected returns. J Finance 51:3–53CrossRefGoogle Scholar
  28. Johansen S (1988) Statistical analysis of cointegration vectors. J Econ Dyn Control 12:231–254CrossRefGoogle Scholar
  29. Johansen S (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59:1551–1580CrossRefGoogle Scholar
  30. Keim D, Stambaugh R (1986) Predicting returns in the stock and bond markets. J Finance Econ 17:357–390CrossRefGoogle Scholar
  31. Kothari S, Shanken J (1997) Book/market, dividend yield, and expected market returns: a time-series analysis. J Finance Econ 44:169–203CrossRefGoogle Scholar
  32. Lakonishok J, Shleifer A, Vishny R (1994) Contrarian investment, extrapolation and risk. J Finance 49:1541–1578CrossRefGoogle Scholar
  33. Lettau M, Ludvigson S (2001a) Consumption, agregate wealth and expected stock returns. J Finance 56:815–849CrossRefGoogle Scholar
  34. Lettau M, Ludvigson S (2001b) Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying. J Polit Econ 109:1238–1287CrossRefGoogle Scholar
  35. Lettau M, Ludvigson S (2001c) Measuring and modeling variation in the risk-return trade off. CEPR Discussion Papers no. 3105Google Scholar
  36. Lettau M, Ludvigson S (2002) Tay’s as good as Cay: Reply. Working Paper, Department of Economics, New York UniversityGoogle Scholar
  37. Lewellen J (2004) Predicting returns with financial ratios. J Financ Econ 74:209–235CrossRefGoogle Scholar
  38. Liew J, Vassalou M (2000) Can book/market, size and momentum be risk factors that predict economic growth? J Finance Econ 57:221–245CrossRefGoogle Scholar
  39. MacKinlay A (1995) Multifactor models do not explain deviations from the CAPM. J Financ Econ 38:3–28CrossRefGoogle Scholar
  40. Newey W, West K (1987) A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55:703–708CrossRefGoogle Scholar
  41. Nieto B (2002) La Valoración Intertemporal de Activos: Un Análisis Empírico para el Mercado Español de Valores. Investigaciones Económicas 26:497–524Google Scholar
  42. Ohlson J (1995) Earnings, book values, and dividends in security valuation. Contemp Accoun Res 11:661–687Google Scholar
  43. Pontiff J, Schall L (1999) Book/market ratios as predictors of market returns. J Financ Econ 49:141–160CrossRefGoogle Scholar
  44. Poterba J, Summers L (1988) Mean reversion in stock prices: evidence and implications. J Financ Econ 22:27–60CrossRefGoogle Scholar
  45. Rodríguez R, Restoy F, Peña I (2002) Can output explain the predictability and volatility of stock returns? J Int Money Finance 21:161–183CrossRefGoogle Scholar
  46. Rosenberg B, Reid K, Lanstein R (1985) Persuasive evidence of market inefficiency. J Portf Manage 11:9–17CrossRefGoogle Scholar
  47. Rudd J, Whelan K (2002) A note on the cointegration of consumption, income, and wealth. Working Paper, Federal Reserve Board, Washington DCGoogle Scholar
  48. Santos T, Veronesi P (2004) Labour income and predictable stock returns. Rev Financ Stud (in press)Google Scholar
  49. Serrano L, Pastor J (2002) El Valor Económico del Capital Humano. Cuadernos de Capital Humano, IVIE WP2002–24Google Scholar
  50. Stambaugh R (1999) Predictive regressions. J Financ Econ 5:375–421CrossRefGoogle Scholar
  51. Vuolteenaho T (2000) Understanding the aggregate book/market ratio. Working Paper, Department of Economics, Harvard UniversityGoogle Scholar
  52. White H (1980) A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica 48:817–838CrossRefGoogle Scholar

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

Personalised recommendations