Date Added: Apr 2010
I assess the role of wealth and systemic risk in explaining future asset returns. The author shows that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, the author finds that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: when they are seen as a component of asset wealth, investors react in the same manner; if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia.