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Collateralizable Wealth, Asset Returns, and Systemic Risk: International Evidence

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Abstract

I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.

Suggested Citation

  • Ricardo M. Sousa, 2010. "Collateralizable Wealth, Asset Returns, and Systemic Risk: International Evidence," NIPE Working Papers 15/2010, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:15/2010
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    Cited by:

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    2. João Sousa & Ricardo M. Sousa, 2011. "Asset Returns Under Model Uncertainty: Evidence from the euro area, the U.K. and the U.S," Working Papers w201119, Banco de Portugal, Economics and Research Department.
    3. Caporale, Guglielmo Maria & Sousa, Ricardo M., 2016. "Consumption, wealth, stock and housing returns: Evidence from emerging markets," Research in International Business and Finance, Elsevier, vol. 36(C), pages 562-578.

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    More about this item

    Keywords

    stock returns; government bond yields; systemic crises.;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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