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The Consumption-Wealth Ratio, Real Estate Wealth, and the Japanese Stock Market

Author

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  • Aono, Kohei
  • Iwaisako, Tokuo

Abstract

The first contribution of this paper, following the works of Lettau and Ludvigson (2001a,b), is construction of the Japanese consumption-wealth ratio data series and to examine whether it explains Japanese stock market data. We find that the consumption-wealth ratio does not predict future stock returns, but it does help to explain the cross-section of Japanese stock returns. The second contribution of the paper is that we propose new consumption-wealth ratios in terms of which we more explicitly deal with household real estate wealth utilizing Japanese aggregate level data. Such "real estate augmented" consumption-wealth ratios work in a similar way, but perform better than, the consumption-wealth ratio calculated with only financial wealth data. While the scaled factor model with the consumption-wealth ratio proposed by Lettau and Ludvigson performs relatively well with Japanese data, the book-to-market related anomaly pointed out by Jagannathan et al. (1998) remains strong.

Suggested Citation

  • Aono, Kohei & Iwaisako, Tokuo, 2008. "The Consumption-Wealth Ratio, Real Estate Wealth, and the Japanese Stock Market," Discussion Paper Series a504, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hituec:a504
    Note: July 13, 2008, The previous version of this paper was circulated under the title of "The Consumption-Wealth Ratio and the Japanese Stock Market". We made substantial changes to the calculation of the variables used in the empirical analyses in this current version.
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/15872/1/DP504.pdf
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    References listed on IDEAS

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    1. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
    2. Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2013. "The Wealth-Consumption Ratio," Review of Asset Pricing Studies, Oxford University Press, vol. 3(1), pages 38-94.
    3. Paul P.J. Gao & Kevin X.D. Huang, 2008. "Aggregate Consumption-Wealth Ratio and the Cross-Section of Stock Returns: Some International Evidence," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 1-37, May.
    4. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, April.
    5. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
    6. Hanno N. Lustig & Stijn G. Van Nieuwerburgh, 2005. "Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective," Journal of Finance, American Finance Association, vol. 60(3), pages 1167-1219, June.
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    Cited by:

    1. Márquez, Elena & Martínez-Cañete, Ana R. & Pérez-Soba, Inés, 2013. "Wealth shocks, credit conditions and asymmetric consumption response: Empirical evidence for the UK," Economic Modelling, Elsevier, vol. 33(C), pages 357-366.
    2. Kohei Aono & Tokuo Iwaisako, 2011. "Forecasting Japanese Stock Returns with Financial Ratios and Other Variables," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 18(4), pages 373-384, November.

    More about this item

    Keywords

    consumption-wealth ratio; cointegration; cross-section of stock returns;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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