tay's as good as cay
The empirical evidence that the consumption–wealth ratio, cay, has strong in-sample predictive power for future stock returns has been interpreted as evidence that consumers take account of future investment opportunities in planning their consumption expenditures. In this paper we show that the pre...
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Published in | Finance research letters Vol. 2; no. 1; pp. 1 - 14 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
Elsevier Inc
01.03.2005
Elsevier |
Series | Finance Research Letters |
Online Access | Get full text |
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Summary: | The empirical evidence that the consumption–wealth ratio,
cay, has strong in-sample predictive power for future stock returns has been interpreted as evidence that consumers take account of future investment opportunities in planning their consumption expenditures. In this paper we show that the predictive power of
cay arises mainly from a “look-ahead bias” introduced by estimating the parameters of the cointegrating regression between consumption, assets, and labor income
in-sample. When a similar regression is run, replacing the log of consumption with an inanimate variable, calendar time, the resulting residual, which we label
tay, is shown to be able to forecast stock returns as well as, or better than,
cay. In addition, both
cay and
tay lose their out-of-sample forecasting power when they are re-estimated every period with only available data. |
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ISSN: | 1544-6123 1544-6131 |
DOI: | 10.1016/j.frl.2004.10.001 |