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The Wealth-Consumption Ratio

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  • Lustig, Hanno
  • van Nieuwerburgh, Stijn
  • Verdelhan, Adrien

Abstract

We derive new estimates of total wealth, the returns on total wealth, and the wealth effect on consumption. We estimate the prices of aggregate risk from bond yields and stock returns using a no-arbitrage model. Using these risk prices, we compute total wealth as the price of a claim to aggregate consumption. We find that US households have a surprising amount of total wealth, most of it human wealth. This wealth is much less risky than stock market wealth. Events in long-term bond markets, not stock markets, drive most total wealth fluctuations. The wealth effect on consumption is small and varies over time with real interest rates.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9022.

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Date of creation: Jun 2012
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Handle: RePEc:cpr:ceprdp:9022

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Keywords: discount rate; equity risk premium; excess return; interest rate; risk premium; stock market; stock returns;

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References

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