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Consumption and Expected Asset Returns Without Assumptions About Unobservables

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  • Whelan, Karl

    (Central Bank and Financial Services Authority of Ireland)

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.centralbank.ie/publications/Documents/4RT06.pdf
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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 4/RT/06.

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Length: 29 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:cbi:wpaper:4/rt/06

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  1. John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
  2. 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.
  3. Gourinchas, Pierre-Olivier & Rey, Hélène, 2005. "International Financial Adjustment," CEPR Discussion Papers 4923, C.E.P.R. Discussion Papers.
  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.
  5. Michael Palumbo & Jeremy Rudd & Karl Whelan, 2002. "On the relationships between real consumption, income and wealth," Finance and Economics Discussion Series 2002-38, Board of Governors of the Federal Reserve System (U.S.).
  6. Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
  7. repec:fth:harver:1435 is not listed on IDEAS
  8. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
  9. 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.
  10. Lettau, Martin & Ludvigson, Sydney C., 2005. "tay's as good as cay: Reply," Finance Research Letters, Elsevier, vol. 2(1), pages 15-22, March.
  11. Brennan, Michael J. & Xia, Yihong, 2005. "tay's as good as cay," Finance Research Letters, Elsevier, vol. 2(1), pages 1-14, March.
  12. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
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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," NIPE Working Papers 33/2011, NIPE - Universidade do Minho.
  2. Pierre Lafourcade, 2008. "Are Asset Returns Predictable from the National Accounts?," DNB Working Papers 189, Netherlands Central Bank, Research Department.
  3. Chauvin, V. & Damette, O., 2010. "Wealth effects: the French case," Working papers 276, Banque de France.
  4. Guglielmo Maria Caporale & Ricardo M. Sousa, 2011. "Consumption, Wealth, Stock and Housing Returns: Evidence from Emerging Markets," NIPE Working Papers 32/2011, NIPE - Universidade do Minho.

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