Wealth-to-income ratio and stock returns: evidence from the Euro Area
I find that when the ratio of asset wealth to human wealth falls, investors become more exposed to labour income shocks and demand a higher risk premium for stocks. I show that the residuals of the trend relationship among wealth and labour income, wy , predict future stock returns in the Euro Area. The results are robust to additional control variables and show the superiority of wy vis-a-vis other benchmark models.
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Volume (Year): 19 (2012)
Issue (Month): 7 (May)
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