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Consumption-wealth ratio and expected stock returns: evidence from panel data

Submitted by Andressa Souza Campos Monteiro de Castro (dessascmc@gmail.com) on 2015-04-29T19:10:59Z
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Previous issue date: 2015-03-20 / This paper investigates the role of consumption-wealth ratio on predicting future stock returns through a panel approach. We follow the theoretical framework proposed by Lettau and Ludvigson (2001), in which a model derived from a nonlinear consumer’s budget constraint is used to settle the link between consumption-wealth ratio and stock returns. Using G7’s quarterly aggregate and financial data ranging from the first quarter of 1981 to the first quarter of 2014, we set an unbalanced panel that we use for both estimating the parameters of the cointegrating residual from the shared trend among consumption, asset wealth and labor income, cay, and performing in and out-of-sample forecasting regressions. Due to the panel structure, we propose different methodologies of estimating cay and making forecasts from the one applied by Lettau and Ludvigson (2001). The results indicate that cay is in fact a strong and robust predictor of future stock return at intermediate and long horizons, but presents a poor performance on predicting one or two-quarter-ahead stock returns.

Identiferoai:union.ndltd.org:IBICT/oai:bibliotecadigital.fgv.br:10438/13668
Date20 March 2015
CreatorsCastro, Andressa Souza Campos Monteiro
ContributorsGomes, Fabio Augusto Reis, Gaglianone, Wagner Piazza, Escolas::EPGE, FGV, Issler, João Victor
Source SetsIBICT Brazilian ETDs
LanguageEnglish
Detected LanguageEnglish
Typeinfo:eu-repo/semantics/publishedVersion, info:eu-repo/semantics/masterThesis
Sourcereponame:Repositório Institucional do FGV, instname:Fundação Getulio Vargas, instacron:FGV
Rightsinfo:eu-repo/semantics/openAccess

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