Consumption, Wealth, Stock and Government Bond Returns: International Evidence
Technical University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); European Central Bank (ECB)
Ricardo M. Sousa
University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics
February 1, 2011
ISEG-UTL Economics Working Paper No. 09/2011/DE/UECE
In this paper, we show, from the consumer’s budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth, and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signaling a future rise in taxes, then they will temporarily reduce their consumption.
Number of Pages in PDF File: 30
Keywords: Consumption, Wealth, Stock Returns, Bond Returns
JEL Classification: E21, E44, D12working papers series
Date posted: March 5, 2011
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