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The Consumption-Wealth And Book-To-Market Ratios In A Dynamic Asset Pricing Context

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Author Info

  • Belén Nieto

    (Universidad de Alicante)

  • Rosa Rodríguez

    (Universidad Europea de Madrid)

  • Rosa Rodríguez- Barrera

    (Universitat de València)

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    Abstract

    We discuss whether stock returns in Spain are predictable using a proxy for the logarithm of the consumption-aggregate wealth ratio, specifically the deviations of the common trend in consumption, labor income, and household asset holdings. The predictability regression used is based on intertemporal asset pricing models, which indicate that the consumption-wealth ratio is a function of the expected returns. The difficulties in this unobservable ratio are solved as in Lettau and Ludvigson (2001). The results show a partial capability of the proxy to forecast returns, but a good behavior of the book-to-market ratio as a predictor. A positive and approximate linear relationship between this financial ratio and the macroeconomic variable can be proved theoretically and supported empirically, thus confirming the predictive power of the book-to-market and, of course, its use as a state variable in asset pricing models. En este trabajo nos preguntamos si en España los rendimientos financieros se pueden predecir utilizando una proxy del logaritmo del ratio consumo/riqueza, concretamente las desviaciones en la tendencia común existente entre el consumo, la renta laboral y la riqueza financiera de los hogares. Esta relación de predecibilidad está inspirada en los modelos intertemporales de valoración de activos, que indican que este ratio es una función de los rendimientos esperados futuros. Las dificultades inherentes a este ratio, no observable en la práctica, se resuelven como en Lettau and Ludvigson (2001). Los resultados muestran una moderada capacidad del ratio consumo/riqueza en la predicción de rendimientos, sin embargo ponen de manifiesto la sorprendente capacidad del ratio agregado valor contable/valor de mercado. Una aproximada relación lineal y positiva entre este ratio financiero y la variable macroeconómica puede probarse teóricamente y verificarse empíricamente, justificando, de esta forma, el poder de predicción de rendimientos que presenta el ratio valor contable/valor de mercado y, por tanto, su generalizado uso como instrumento en los modelos de valoración.

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    File URL: http://www.ivie.es/downloads/docs/wpasec/wpasec-2002-24.pdf
    File Function: Fisrt version / Primera version, 2002
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie EC with number 2002-24.

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    Length: 38 pages
    Date of creation: Sep 2002
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasec:2002-24

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    Related research

    Keywords: Mercado de valores; Predecibilidad; Consumo; Riqueza; Valor contable/Valor de mercado. Stock markets; Predictability; Consumption; Aggregate wealth; Book-to-Market.;

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    References

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    Cited by:
    1. Marcelo, Jose Luis Miralles & Quiros, Maria del Mar Miralles, 2006. "The role of an illiquidity risk factor in asset pricing: Empirical evidence from the Spanish stock market," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 254-267, May.
    2. Belén Nieto & Rosa Rodríguez, 2004. "Modelos De Valoracion De Activos Condicionales: Un Panorama Comparativo Con Datos Españoles," Documentos de Trabajo de Economía de la Empresa db040202, Universidad Carlos III, Departamento de Economía de la Empresa.
    3. Martinez, Miguel A. & Nieto, Belen & Rubio, Gonzalo & Tapia, Mikel, 2005. "Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 81-103.

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