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The Wealth-Consumption Ratio

  • Hanno Lustig
  • Stijn Van Nieuwerburgh
  • Adrien Verdelhan

We set up an exponentially affine stochastic discount factor model for bond yields and stock returns in order to estimate the prices of aggregate risk. We use the estimated risk prices to compute the no-arbitrage price of a claim to aggregate consumption. The price-dividend ratio of this claim is the wealth-consumption ratio. Our estimates indicate that total wealth is much safer than stock market wealth. The consumption risk premium is only 2.2 percent, substantially below the equity risk premium of 6.9 percent. As a result, the average US household has more wealth than one might think; most of it is human wealth. A large fraction of the variation in total wealth can be traced back to changes in long-term real interest rates. Contrary to conventional wisdom, we find that events in bond markets, not stock markets, matter most for understanding fluctuations in total wealth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13896.

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Date of creation: Mar 2008
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Publication status: published as Rev Asset Pric Stud (2013) 3 (1): 38-94. doi: 10.1093/rapstu/rat002 First published online: April 11, 2013
Handle: RePEc:nbr:nberwo:13896
Note: AP EFG IFM ME
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