Working Paper: NBER ID: w13896
Authors: Hanno Lustig; Stijn Van Nieuwerburgh; Adrien Verdelhan
Abstract: 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.
Keywords: Wealth-Consumption Ratio; Asset Pricing; Consumption Risk Premium
JEL Codes: E21; G10; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in total wealth (E21) | changes in long-term real interest rates (E43) |
| changes in long-term real interest rates (E43) | fluctuations in total wealth (E21) |
| changes in long-term real interest rates (E43) | per capita wealth (D31) |
| real bond yields (E43) | wealth-consumption ratio (E21) |
| bond risk premium (G12) | consumption risk premium (D11) |
| consumption cash flow risk (E21) | total consumption risk premium (D11) |
| total wealth (D31) | stock market wealth (G19) |