The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street

Review of Financial Studies (2008), 21(5)

NYU Working Paper No. FIN-05-023

63 Pages Posted: 3 Nov 2008 Last revised: 27 Aug 2012

See all articles by Hanno N. Lustig

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); ABFER

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2005

Abstract

We use a standard single-agent model to conduct a simple consumption growthaccounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market.

Suggested Citation

Lustig, Hanno N. and Van Nieuwerburgh, Stijn, The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street (August 1, 2005). Review of Financial Studies (2008), 21(5), NYU Working Paper No. FIN-05-023, Available at SSRN: https://ssrn.com/abstract=1294159

Hanno N. Lustig (Contact Author)

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Stijn Van Nieuwerburgh

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