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Consumption and expected asset returns without assumptions about unobservables

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  • Whelan, Karl

Abstract

If asset returns are predictable, then rational expectations and the arithmetic of budget constraints together imply that these predictable changes in returns should affect current consumption. This paper presents a new framework linking consumption, income, and observable assets to expectations of future asset returns. Relative to previous work on this topic, the framework proposed in this paper has a number of advantages including not relying on untestable assumptions concerning unobservable variables and not requiring estimation of unknown parameters to arrive at a forecasting variable.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-4TFW9FF-1/2/9cfbb49503e141d646b5e95d918ac8fc
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 7 (October)
Pages: 1209-1221

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Handle: RePEc:eee:moneco:v:55:y:2008:i:7:p:1209-1221

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Web page: http://www.elsevier.com/locate/inca/505566

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Keywords: Consumption Asset returns;

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References

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  1. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
  2. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers.
  3. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  4. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
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  7. Brennan, Michael J. & Xia, Yihong, 2005. "tay's as good as cay," Finance Research Letters, Elsevier, vol. 2(1), pages 1-14, March.
  8. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
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  10. repec:fth:harver:1435 is not listed on IDEAS
  11. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  12. Palumbo, Michael & Rudd, Jeremy & Whelan, Karl, 2002. "On the Relationships Between Real Consumption, Income, and Wealth," Research Technical Papers 4/RT/02, Central Bank of Ireland.
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Cited by:
  1. Guglielmo Maria Caporale & Ricardo M. Sousa, 2011. "Are Stock and Housing Returns Complements or Substitutes? Evidence from OECD Countries," CESifo Working Paper Series 3621, CESifo Group Munich.
  2. Guglielmo Maria Caporale & Ricardo M. Sousa, 2011. "Consumption, Wealth, Stock and Housing Returns: Evidence from Emerging Markets," CESifo Working Paper Series 3601, CESifo Group Munich.
  3. Chauvin, V. & Damette, O., 2010. "Wealth effects: the French case," Working papers 276, Banque de France.
  4. Pierre Lafourcade, 2008. "Are Asset Returns Predictable from the National Accounts?," DNB Working Papers 189, Netherlands Central Bank, Research Department.

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