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On the real-time forecasting ability of the consumption-wealth ratio

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  • Hui Guo

Abstract

Lettau and Ludvigson (2001a) show that the consumption-wealth ratio-the error term from the cointegration relation among consumption, net worth, and labor income-forecasts stock market returns out of sample. In this paper, we reexamine their evidence using real-time data. Consistent with the early authors, we find that consumption and labor income data are subject to substantial revisions, which reflect (1) incorporating new information or methodologies and (2) reducing noise. Consequently, in contrast with the results obtained from the current vintage, the out-of-sample forecasting power of the consumption-wealth ratio is found to be negligible in real time. (Earlier version titled: Does the consumption-wealth ratio forecast stock market returns in real time?

Suggested Citation

  • Hui Guo, 2003. "On the real-time forecasting ability of the consumption-wealth ratio," Working Papers 2003-007, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2003-007
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    Cited by:

    1. Pierdzioch, Christian & Döpke, Jörg & Hartmann, Daniel, 2008. "Forecasting stock market volatility with macroeconomic variables in real time," Journal of Economics and Business, Elsevier, vol. 60(3), pages 256-276.
    2. Hui Guo & Jason Higbee, 2006. "Market timing with aggregate and idiosyncratic stock volatilities," Working Papers 2005-073, Federal Reserve Bank of St. Louis.
    3. Döpke, Jörg & Hartmann, Daniel & Pierdzioch, Christian, 2008. "Real-time macroeconomic data and ex ante stock return predictability," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 274-290.

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    Keywords

    Stock market; Asset pricing;

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