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Does Consumption-Wealth Ratio Signal Stock Returns? - VECM Results for Germany

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  • Fang Xu

    (Christian-Albrechts-University of Kiel)

Abstract

This paper studies the signalling effect of the consumption-wealth ratio (cay) on German stock returns via vector error correction models (VECMs). The effect of cay on U.S. stock returns has been recently confirmed by Lettau and Ludvigson with a two-stage method. In this paper, performance of the VECMs and the two-stage method are compared in both German and U.S. data. It is found that the VECMs are more suitable to study the effect of cay on stock returns than the two-stage method. Using the Conditional-Subset VECM, cay signals real stock returns and excess returns in both data sets significantly. The estimated coefficient on cay for stock returns turns out to be two times greater in U.S. data than in German data. When the two-stage method is used, cay has no significant effect on German stock returns. Besides, it is also found that cay signals German wealth growth and U.S. income growth significantly.

Suggested Citation

  • Fang Xu, 2005. "Does Consumption-Wealth Ratio Signal Stock Returns? - VECM Results for Germany," Economics Bulletin, AccessEcon, vol. 3(30), pages 1-13.
    • Handle: RePEc:ebl:ecbull:eb-05c30002
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    References listed on IDEAS

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    1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    2. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    3. repec:fth:harver:1435 is not listed on IDEAS
    4. Cochrane, John H, 1991. "Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations," Journal of Finance, American Finance Association, vol. 46(1), pages 209-237, March.
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    Cited by:

    1. Della Corte, Pasquale & Sarno, Lucio & Valente, Giorgio, 2010. "A century of equity premium predictability and the consumption-wealth ratio: An international perspective," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 313-331, June.
    2. Olivier Allain, 2011. "The impact of income distribution on consumption: a reassessment," Post-Print hal-00712657, HAL.

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    More about this item

    Keywords

    consumption-wealth ratio;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G0 - Financial Economics - - General

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