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The Wealth-Consumption Ratio
Stijn Van Nieuwerburgh New York University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Hanno N. Lustig UCLA, Anderson School of Management; National Bureau of Economic Research (NBER) Adrien Verdelhan Boston University - Department of Economics; National Bureau of Economic Research (NBER); Banque de France - Economic Study and Research Division August 25, 2009 NYU Working Paper No. FIN-08-045 AFA 2008 New Orleans Meetings Paper EFA 2007 Ljubljana Meetings Paper 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. Nearly all 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. Working Paper Series Date posted: March 09, 2009 ; Last revised: September 01, 2009Suggested CitationContact Information
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