Consumption, housing and financial wealth, asset returns, and monetary policy.

Sousa, Ricardo Jorge Magalhaes de Abreu Santos (2007) Consumption, housing and financial wealth, asset returns, and monetary policy. PhD thesis, London School of Economics and Political Science.

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Abstract

This work analyzes the linkages between consumption, housing and financial wealth, asset returns, and monetary policy. In Chapter I, I show, from the consumer's budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income, cday, should better predict stock returns than a variable like cay from Lettau and Ludvigson (2001), and that this is due to: (i) the ability to track changes in the wealth composition; and (ii) the faster rate of convergence of the coefficients to the "long-run equilibrium" parameters. In Chapter II, I analyze the empirical relationship between wealth shocks and portfolio composition, and find evidence consistent with counter-cyclical risk aversion. I also show that: (i) there is no evidence of inertia; and (ii) time-variation in expectations about future returns partially explains changes in the risky asset share. In Chapter III, I show that monetary policy contractions have a large and negative impact on housing prices, although the reaction is extremely slow. On the contrary, the effect on stock markets is small and very quick. In Chapter IV, I analyze the importance of the risks for the long-run, and show that they explain a large fraction of the cross-sectional variation of average returns. I also find that the preference for a smooth path of consumption, a low intertemporal elasticity of substitution, and a high risk aversion, imply that agents demand large equity risk premia when they fear a reduction in economic prospects. In Chapter V, I investigate the role of three major sources of risk: future changes in the housing consumption share, cr, future labour income growth, Ir, and future consumption growth, Irc. I show that the predictability of many empirical proxies can be achieved without relying on a specific functional form for consumer's preferences.

Item Type:	Thesis (PhD)
Uncontrolled Keywords:	Economics, General, Home Economics
Sets:	Collections > ProQuest Etheses Departments > Economics
URI:	http://etheses.lse.ac.uk/id/eprint/2170

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