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Consumption with earnings, liquidity, and market based models

Author

Listed:
  • Robert Snigaroff

    (Denali Advisors)

  • David Wroblewski

    (San Diego City College)

Abstract

The market, earnings, and liquidity growth combine to form a proxy for wealth growth, allowing a recursive consumption model with a low risk aversion coefficient, a risk-free rate close to historical, a high equity premium, and a reasonable elasticity of intertemporal substitution. The empirical consumption model does well against major asset pricing puzzles. Tested over 118 years it is not rejected while a forward-looking consumption model using the market alone as a wealth proxy fails. Changing liquidity and earnings forecast consumption and their ‘crashes’ precede consumption declines. We also demonstrate related stock level factors have similar economic magnitude and are significant. These models are consistent to the financial intermediary economic growth literature. Such consistency across approaches adds credence to common earnings and liquidity factors as important risks to investors.

Suggested Citation

  • Robert Snigaroff & David Wroblewski, 2023. "Consumption with earnings, liquidity, and market based models," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 501-530, February.
    • Handle: RePEc:kap:rqfnac:v:60:y:2023:i:2:d:10.1007_s11156-022-01103-6
    DOI: 10.1007/s11156-022-01103-6
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