DP9022 The Wealth-Consumption Ratio

Author(s): Hanno Lustig, Stijn van Nieuwerburgh, Adrien Verdelhan
Publication Date: June 2012
Keyword(s): discount rate, equity risk premium, excess return, interest rate, risk premium, stock market, stock returns
JEL(s): e21, G10, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9022

We derive new estimates of total wealth, the returns on total wealth, and the wealth effect on consumption. We estimate the prices of aggregate risk from bond yields and stock returns using a no-arbitrage model. Using these risk prices, we compute total wealth as the price of a claim to aggregate consumption. We find that US households have a surprising amount of total wealth, most of it human wealth. This wealth is much less risky than stock market wealth. Events in long-term bond markets, not stock markets, drive most total wealth fluctuations. The wealth effect on consumption is small and varies over time with real interest rates.