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Title: Consumption, housing and financial wealth, asset returns, and monetary policy
Author: Sousa, Ricardo Jorge Magalhaes de Abreu Santos
Awarding Body: London School of Economics and Political Science (University of London)
Current Institution: London School of Economics and Political Science (University of London)
Date of Award: 2007
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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.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available