Advanced Search
MyIDEAS: Login to save this paper or follow this series

Proprietary Income, Entrepreneurial Risk and the Predictability of U.S. Stock Returns

Contents:

Author Info

  • Mathias Hoffmann

    ()
    (Economics University of Dortmund)

Abstract

The paper contributes to a recent empirical and theoretical literature that suggests that proprietors are an important group of stockholders and that entrepreneurial risk could therefore help explain time-varying risk premia on the aggregate stock market. I use the intertemporal budget constraint of the average U.S. household to derive a cointegrating relationship between consumption and income from proprietary and non-proprietary wealth. I call this cointegrating relationship the cpy -residual. I interpret cpy as an entrepreneurial risk factor, because it mainly reflects cyclical fluctuations in proprietary income and because it is highly correlated with cross-sectional measures of idiosyncratic entrepreneurial risk. The cpy residual turns out to be a potent predictor of excess returns on the aggregate stock market in postwar U.S. data. However, this predictive power has started to decline since the beginning of the 1980s as stock market participation has widened with the advent of tax-deferable employer-sponsored pension plans and as proprietary income risk has become more easily diversifiable in the wake of state level bank deregulation

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.wiso.uni-dortmund.de/lsfg/ae/en/content/research/research.html
Our checks indicate that this address may not be valid because: 404 Not Found (http://www.wiso.uni-dortmund.de/lsfg/ae/en/content/research/research.html [302 Found]--> http://www.wiso.tu-dortmund.de/lsfg/ae/en/content/research/research.html). If this is indeed the case, please notify (Christopher F. Baum)
File Function: main text
Download Restriction: no

File URL: http://repec.org/sce2005/up.11673.1107113976.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 229.

as in new window
Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:229

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

Related research

Keywords: Non-insurable background risk; entrepreneurial income; equity premium; long-horizon predictability; consumption risk sharing;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Martin Lettau & Sydney Ludvigson, 2003. "Expected Returns and Expected Dividend Growth," NBER Working Papers 9605, National Bureau of Economic Research, Inc.
  2. Rudd, Jeremy & Whelan, Karl, 2002. "A Note on the Cointegration of Consumption, Income, and Wealth," Research Technical Papers 5/RT/02, Central Bank of Ireland.
  3. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  4. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
  5. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  6. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  7. Yuliya Demyanyk & Charlotte Ostergaard & Bent E. Sørensen, 2006. "FU.S. banking deregulation, small businesses, and interstate insurance of personal income," Working Paper 2006/09, Norges Bank.
  8. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  9. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  10. Owen Lamont, . "Earnings and Expected Returns," CRSP working papers 345, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  12. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
  13. Heaton, John & Lucas, Deborah, 2000. "Portfolio Choice in the Presence of Background Risk," Economic Journal, Royal Economic Society, vol. 110(460), pages 1-26, January.
  14. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  15. Hoffmann, Mathias, 2000. "Long run recursive VAR models and QR decompositions," Discussion Paper Series In Economics And Econometrics 0015, Economics Division, School of Social Sciences, University of Southampton.
  16. Mankiw, N.G. & Zeldes, S.P., 1990. "The Consumption Of Stockholders And Non-Stockholders," Weiss Center Working Papers 23-90, Wharton School - Weiss Center for International Financial Research.
  17. Mark Gertler & R. Glenn Hubbard, 1991. "Corporate Financial Policy, Taxation, and Macroeconomic Risk," NBER Working Papers 3902, National Bureau of Economic Research, Inc.
  18. Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
  19. Polkovnichenko, Valery, 2004. "Limited stock market participation and the equity premium," Finance Research Letters, Elsevier, vol. 1(1), pages 24-34, March.
  20. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, October.
  21. 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.
  22. Proietti, Tommaso, 1997. "Short-Run Dynamics in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(3), pages 405-22, August.
  23. Cochrane, John H, 1994. "Permanent and Transitory Components of GNP and Stock Prices," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 241-65, February.
  24. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  25. repec:fth:harver:1435 is not listed on IDEAS
  26. Poterba, James M & Venti, Steven F & Wise, David A, 1998. "401(k) Plans and Future Patterns of Retirement Saving," American Economic Review, American Economic Association, vol. 88(2), pages 179-84, May.
  27. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Thomas Nitschka, 2010. "Idiosyncratic consumption risk and predictability of the carry trade premium: Euro-Area evidence," Financial Markets and Portfolio Management, Springer, vol. 24(1), pages 49-65, March.
  2. Britta Hamburg & Mathias Hoffmann & Joachim Keller, 2005. "Consumption, Wealth and Business Cycles in Germany," CESifo Working Paper Series 1443, CESifo Group Munich.
  3. Benjamin R. Auer, 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 232(5), pages 518-544, September.
  4. Mathias Hoffmann & Thomas Nitschka, 2009. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," CESifo Working Paper Series 2527, CESifo Group Munich.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:229. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.