IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v71y2024ics0275531924002678.html
   My bibliography  Save this article

Predicting consumption-wealth ratio changes and stock market returns

Author

Listed:
  • Wang, Jingya
  • Taylor, Alex P.

Abstract

We show that the ability of Lettau and Ludvigson’s cay ratio to predict stock market returns could be greatly improved when adjustment is made for variations in expected cay ratio changes. We use the present-value identity of Campbell and Mankiw (1989) to derive the appropriate form of the adjustment and model the adjustment using a handful of macroeconomic variables. We find that the expected cay ratio changes vary in a predictable manner. Using our model to adjust cay improves the annual R̄2 values from 4.42% to 9.55% for in-sample prediction of excess market returns, and the out-of-sample pseudo R2 values increase from -1.88% and -1.72% to 2.38% and 3.69% with the first estimations using information up to 1985 and 1990, respectively. The superior performance also exists in medium-term market return predictions.

Suggested Citation

  • Wang, Jingya & Taylor, Alex P., 2024. "Predicting consumption-wealth ratio changes and stock market returns," Research in International Business and Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:riibaf:v:71:y:2024:i:c:s0275531924002678
    DOI: 10.1016/j.ribaf.2024.102474
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531924002678
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2024.102474?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Predictability; Consumption-wealth ratio; Expected returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:71:y:2024:i:c:s0275531924002678. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.