Working Paper: NBER ID: w11564
Authors: Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market.
Keywords: human capital; market returns; consumption growth; financial wealth; labor income
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| innovations in current and future human wealth returns (O39) | innovations in current and future financial asset returns (G19) |
| good news about current financial market returns (G11) | bad news about current labor market returns (J49) |
| positive innovations to future risk premia on financial wealth (G19) | negative innovations to expected future returns on human wealth (E21) |
| implied total market return (G19) | financial wealth returns (G19) |