On the Estimation of the Consumption-Wealth Ratio: Cointegrating Parameter Instability and its Implications for Stock Return Forecasting

31 Pages Posted: 6 Dec 2001

See all articles by Jaehoon Hahn

Jaehoon Hahn

University of Washington - Michael G. Foster School of Business

Hangyong Lee

KDI School of Public Policy and Management

Date Written: November 28, 2001

Abstract

This paper investigates if the parameters of the cointegration among consumption, asset wealth, and labor income are stable over the post-war sample period. Although Lettau and Ludvigson (2001a) find that the estimated consumption-wealth ratio (CAY) is a strong predictor of aggregate stock returns, the instability of the cointegrating parameters suggests that the empirical applications of CAY are problematic. Our empirical results from subsample estimations, stability tests, error correction coefficients estimations, and rolling regressions all indicate substantial changes in the cointegrating parameter estimates over the sample period, which translates into the deteriorating forecasting power of CAY for aggregate stock returns.

JEL Classification: E21, C10, G00

Suggested Citation

Hahn, Jaehoon and Lee, Hangyong, On the Estimation of the Consumption-Wealth Ratio: Cointegrating Parameter Instability and its Implications for Stock Return Forecasting (November 28, 2001). Available at SSRN: https://ssrn.com/abstract=292240 or http://dx.doi.org/10.2139/ssrn.292240

Jaehoon Hahn (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Hangyong Lee

KDI School of Public Policy and Management ( email )

263 Namsejong-ro
Sejong-si 30149
Korea, Republic of (South Korea)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
439
Abstract Views
2,077
rank
73,302
PlumX Metrics