Consumption, Wealth, Stock and Government Bond Returns: International Evidence

ISEG-UTL Economics Working Paper No. 09/2011/DE/UECE

30 Pages Posted: 5 Mar 2011

See all articles by António Afonso

António Afonso

University of Lisbon - ISEG (School of Economics and Management); UECE (Research Unit on Complexity and Economics); ISEG Lisbon School of Economics and Management,Universidade de Lisboa; REM - Research in Economics and Mathematics

Ricardo M. Sousa

University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics

Date Written: February 1, 2011

Abstract

In this paper, we show, from the consumer’s budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth, and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signaling a future rise in taxes, then they will temporarily reduce their consumption.

Keywords: Consumption, Wealth, Stock Returns, Bond Returns

JEL Classification: E21, E44, D12

Suggested Citation

Afonso, António and Sousa, Ricardo Magalhaes, Consumption, Wealth, Stock and Government Bond Returns: International Evidence (February 1, 2011). ISEG-UTL Economics Working Paper No. 09/2011/DE/UECE, Available at SSRN: https://ssrn.com/abstract=1777228 or http://dx.doi.org/10.2139/ssrn.1777228

António Afonso (Contact Author)

University of Lisbon - ISEG (School of Economics and Management) ( email )

R. Miguel Lupi, 20
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HOME PAGE: http://www.iseg.ulisboa.pt/aquila/homepage/aafonso/research

UECE (Research Unit on Complexity and Economics) ( email )

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ISEG Lisbon School of Economics and Management,Universidade de Lisboa ( email )

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REM - Research in Economics and Mathematics ( email )

ISEG, Universidade de Lisboa
Rua Miguel Lupi, 20
Lisboa, 1249-078
Portugal

HOME PAGE: http://rem.rc.iseg.ulisboa.pt/

Ricardo Magalhaes Sousa

University of Minho ( email )

Campus Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://econ.lse.ac.uk

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