Abstract

http://ssrn.com/abstract=1112008
 
 

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The Wealth-Consumption Ratio


Hanno N. Lustig


UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh


New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Adrien Verdelhan


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

March 2008

NBER Working Paper No. w13896

Abstract:     
We set up an exponentially affine stochastic discount factor model for bond yields and stock returns in order to estimate the prices of aggregate risk. We use the estimated risk prices to compute the no-arbitrage price of a claim to aggregate consumption. The price-dividend ratio of this claim is the wealth-consumption ratio. Our estimates indicate that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2 percent, substantially below the equity risk premium of 6.9 percent. As a result, the average US household has more wealth than one might think; most of it is human wealth. A large fraction of the variation in total wealth can be traced back to changes in long-term real interest rates. Contrary to conventional wisdom, we find that events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth.

Number of Pages in PDF File: 52

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Date posted: March 21, 2008  

Suggested Citation

Lustig, Hanno N. and Van Nieuwerburgh, Stijn and Verdelhan, Adrien, The Wealth-Consumption Ratio (March 2008). NBER Working Paper No. w13896. Available at SSRN: http://ssrn.com/abstract=1112008

Contact Information

Hanno N. Lustig (Contact Author)
UCLA - Anderson School of Management ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance ( email )
44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Adrien Verdelhan
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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