Time‐Varying Risk–Return Trade‐off in the Stock Market

We uncover a strong comovement of the stock market risk–return trade‐off with the consumption–wealth ratio (CAY). The finding reflects time‐varying investment opportunities rather than countercyclical aggregate relative risk aversion. Specifically, the partial risk–return trade‐off is positive and constant when we control for CAY as a proxy for investment opportunities. Moreover, conditional market variance scaled by CAY is negatively priced in the cross‐section of stock returns. Our results are consistent with a limited stock market participation model, in which shareholders require an illiquidity premium that increases with CAY, in addition to the risk premium that is proportional to conditional market variance.     

Time Variation in the Covariance between Stock Returns and Consumption Growth

The conditional covariance between aggregate stock returns and aggregate consumption growth varies substantially over time. When stock market wealth is high relative to consumption, both the conditional covariance and correlation are high. This pattern is consistent with the “composition effect,” where agents' consumption growth is more closely tied to stock returns when stock wealth is a larger share of total wealth. This variation can be used to test asset‐pricing models in which the price of consumption risk varies. After accounting for variations in this price, the relation between expected excess stock returns and the conditional covariance is negative.     

Evidence on the Relationship between Housing and Consumption in the United States: A State‐Level Analysis

We estimate the dynamic effects of U.S. housing market shocks on state‐level spending and home prices from a dynamic common factor model, and identify housing demand and supply shocks using a sign‐restrictions approach. While state‐level spending and house prices gradually respond positively and persistently to aggregate housing demand shocks, there is significant variation across states in the magnitude of these responses. Cross‐state regressions of the estimated responses on an index of mortgage market development suggest that spending in states with greater opportunities for home equity borrowing is more sensitive to housing demand shocks than in states with fewer opportunities, which is consistent with the prominence of a “collateral” channel over a “wealth” channel in explaining the link between housing and the overall economy.     

Consumption, Aggregate Wealth, and Expected Stock Returns

This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth (human capital plus asset holdings) ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and that deviations from this shared trend summarize agents' expectations of future returns on the market portfolio.     

Fixed‐ and Variable‐Rate Mortgages,Business Cycles,and Monetary Policy

This paper studies how the proportion of fixed‐ and variable‐rate mortgages affects business cycles and welfare. I develop and solve a New Keynesian dynamic stochastic general equilibrium model with a housing market and a group of constrained individuals who need housing collateral to obtain loans. The model predicts that with mostly variable‐rate mortgages, an exogenous interest rate shock has larger effects on borrowers than in a fixed‐rate economy. For plausible parameterizations, aggregate differences are muted by wealth effects on labor supply and by the presence of savers. For given monetary policy, a high proportion of fixed‐rate mortgages is welfare enhancing.     

The Conditional CAPM and the Cross-Section of Expected Returns

Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value-weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross-section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross-section of average returns.     

Housing,Illiquidity, and Wealth

This article develops a model of asset allocation relevant for the representative consumer. Consumption is composed of two items: housing, and other goods and services. The representative household's balance sheet consists largely of a house and a mortgage. Its income statement is dominated by labor earnings, constraining cash expenditures. Housing-market behavior thus underlies intertemporal wealth and consumption allocation. With a housing-dominated portfolio and a maximizing plan, a plausible bound on the intertemporal marginal rate of substitution in consumption can be estimated for a typical household. The model takes account of idiosyncratic characteristics of housing returns and finance. Underwriting standards oblige borrowers to secure mortgage debt with a housing asset and with cash flow, usually from labor income. Access to the mortgage market depends on the loan-to-value ratio, or leverage and debt size, and the debt-coverage ratio, or cash solvency. If there are seasonals or predictable patterns in house returns, their magnitude is amplified for the typical liquidity-constrained household. Empirical results for the aggregate U.S. market confirm predictability and serial correlation in house capital gains. There are seasonals in housing returns. While there is no January effect, above-average returns are obtained during the summer months.     

Accruals and the Conditional Equity Premium

Accruals correlate closely with the determinants of the conditional equity premium at both the firm and the aggregate levels. The common component of firm‐level accruals, which cannot be diversified away by aggregation, explains the positive relation between aggregate accruals and future stock market returns. The residual component, which accounts for most variation in firm‐level accruals, is responsible for the negative cross‐sectional relation between firm‐level accruals and future stock returns. Consistent with the risk‐based explanation, aggregate accruals, as a proxy for the conditional equity premium, forecast changes in aggregate economic activity. Moreover, we document a similar comovement of earnings with the conditional equity premium at both the firm and the aggregate levels, which helps explain the negative relation between changes in aggregate earnings and contemporaneous market returns.     

Local Risk,Local Factors,and Asset Prices

Firm location affects firm risk through local factor prices. We find more procyclical factor prices such as wages and real estate prices in areas with more cyclical economies, namely, high “local beta” areas. While procyclical wages provide a natural hedge against aggregate shocks and reduce firm risk, procyclical prices of real estate, which are part of firm assets, increase firm risk. We confirm that firms located in higher local beta areas have lower industry‐adjusted returns and conditional betas, and show that the effect is stronger among firms with low real estate holdings. A production‐based equilibrium model explains these empirical findings.     

Housing returns,precautionary savings and consumption: Micro evidence from China

We investigate how changes in home prices affect consumption in China via a wealth channel. Examining a panel of 7955 households via fixed effects and instrumental variable methods, we find a marginal propensity to consume out of housing wealth (home-price MPC) that is concentrated on goods consumed for pleasure rather than necessity. This trend is driven by the value of second homes rather than that of primary residences, suggesting a wealth channel. We further examine whether returns on housing investment, including rental income and home appreciation, fund the wealth channel; however, we find little supporting evidence. In contrast, a reduction in health risk increases the home-price MPC, but a reduction in income risk that also relieves precautionary saving motives does not. Our results are robust to alternative data, common-factor progress, expenditure shocks and bequest motives. We contribute by examining second homes, which carry little of the dual nature of housing that primary residences do, to identify a controversial wealth channel, and by studying the relative effects of health and income risks on the wealth channel.     

The Consumption–Income Ratio,Entrepreneurial Risk,and the U.S. Stock Market

The owners of small noncorporate businesses face substantial and largely uninsurable entrepreneurial risk. They are also an important group of stock owners. This paper explores the role of entrepreneurial risk in explaining time variation in expected U.S. stock returns in the period 1952–2010. It proposes an entrepreneurial distress factor that is based on a cointegrating relationship between aggregate consumption and income from proprietary and nonproprietary wealth. This factor, referred to here as the cpy residual, signals when entrepreneurial income is low in relation to aggregate consumption and other forms of income in the economy. It is highly correlated with cross‐sectional measures of idiosyncratic entrepreneurial and default risk, and it has considerable forecasting power for the expected equity premium. However, the correlation between cpy and the stock market started to decline at the beginning of the 1980s. The decline in this correlation can be associated with increased stock market participation and with the progress of U.S. state‐level bank deregulation. This pattern is consistent with the view that entrepreneurial risk became more easily diversifiable in the wake of U.S. state‐level bank deregulation.     

Understanding Housing Market Volatility

The Campbell–Shiller present value formula implies a factor structure for the price–rent ratio of housing market. Using a dynamic factor model, we decompose the price–rent ratios of 23 major housing markets into a national factor and independent local factors, and we link these factors to the economic fundamentals of the housing markets. We find that a large fraction of housing market volatility is local and that the national factor has become more important than local factors in driving housing market volatility since 1999, consistent with the findings in Del Negro and Otrok (2007). The local volatilities mostly are due to time variations of idiosyncratic housing market risk premia, not local growth. At the aggregate level, the growth and interest rate factors jointly account for less than half of the total variation in the price–rent ratio. The rest is due to the aggregate housing market risk premium and a pricing error. We find evidence that the pricing error is related to money illusion, especially at the onset of the recent housing market bubble. The rapid rise in housing prices prior to the 2008 financial crisis was accompanied by both a large increase in the pricing error and a large decrease in the housing market risk premium.     

Housing Price Dynamics in Time and Space: Predictability,Liquidity and Investor Returns

It is widely accepted that aggregate housing prices are predictable, but that excess returns to investors are precluded by the transactions costs of buying and selling property. We examine this issue using a unique data set—all private condominium transactions in Singapore during an eleven-year period. We model directly the price discovery process for individual dwellings. Our empirical results clearly reject a random walk in prices, supporting mean reversion in housing prices and diffusion of innovations over space. We find that, when house prices and aggregate returns are computed from models that erroneously assume a random walk and spatial independence, they are strongly autocorrelated. However, when they are calculated from the appropriate model, predictability in prices and in investment returns is completely absent. We show that this is due to the illiquid nature of housing transactions. We also conduct extensive simulations, over different time horizons and with different investment rules, testing whether better information on housing price dynamics leads to superior investment performance.     

Consumption, (dis)aggregate wealth,and asset returns

In this work, I show, from the consumer's budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income (summarized by the variable cday) should predict better U.S. and U.K. quarterly stock market returns than a variable like cay from Lettau and Ludvigson (2001), which considers aggregate wealth instead.I find that the superior forecasting power of cday is due to: (i) its ability to track the changes in the composition of asset wealth; and (ii) the faster rate of convergence of the coefficients to the “long-run equilibrium” parameters.In addition, the results suggest that, while financial wealth shocks are mainly transitory, fluctuations in housing wealth are very persistent. Moreover, they highlight that expectations about future returns are “synchronized” across countries.     

Risk sharing in a financial market with endogenous option prices

This article investigates a financial market in which investors may trade in risk-free bonds, stock and put options written on the stock. In each period, stock and option prices are simultaneously determined by market clearing. While the introduction of put options will decrease the systematic risk in the financial market, it will increase the price of risk. Investors with mean-variance preferences will generally hold portfolios containing the primary asset and the put option and may use the option to increase the risk in their wealth position in exchange for higher returns. Aggregate wealth is unaffected by an option market when there are no spillover effects on stock prices, and it is shown that short selling of options will increase the volatility of individual wealth positions. Investors with erroneous beliefs may on average be better off not trading in put options.     

Analyst Disagreement,Mispricing, and Liquidity*

This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross‐section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.     

干得好不如嫁得好?——房价变动与居民婚姻观念研究

房价的快速上涨是近年来我国经济中的重要现象,对宏观经济增长乃至微观个人的观念与行为都产生了重大的影响,但尚未有研究系统考察房价变化对居民婚姻观念的影响。房价上涨反映了对未来预期的不确定性,这种不确定性势必会影响到人们对工作与婚姻的权衡。本文基于中国综合社会调查(CGSS)2010和2015年数据,详细考察了房价变动对人们在工作与婚姻之间权衡的影响,用人们对“干得好不如嫁得好”的看法来衡量工作与婚姻的权衡。研究结果表明,房价涨幅越高,居民对“干得好不如嫁得好”的认同感越高,且这种现象主要体现在女性群体中。异质性分析表明,女性、未婚女性、已婚女性、女性流动人口、城镇户籍女性以及拥有女儿数量越多的人在工作与婚姻的权衡中更倾向于通过婚姻来抵御未来预期不确定性产生的风险。房价上涨主要通过财富效应和预算约束效应对人们在工作与婚姻之间的权衡产生影响。     

Market Illiquidity and Conditional Equity Premium

We examine the time‐series relation between aggregate bid‐ask spreads and conditional equity premium. We document that average marketwide relative effective bid‐ask spreads forecast aggregate market returns only when controlling for average idiosyncratic variance. This control allows us to document the otherwise elusive relation between illiquidity and returns. The reason is that idiosyncratic variance correlates positively with spreads but has a negative effect on conditional equity premium, causing an omitted variable bias. Our results are robust to standard return predictors, alternative illiquidity measures, and out‐of‐sample tests. These findings are important because they provide strong support for the literature's conjecture that marketwide liquidity is an important asset pricing risk factor.     

Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market

“Limits of Arbitrage” theories hypothesize that the marginal investor in a particular asset market is a specialized arbitrageur rather than a diversified representative investor. We examine the mortgage‐backed securities (MBS) market in this light. We show that the risk of homeowner prepayment, which is a wash in the aggregate, is priced in the MBS market. The covariance of prepayment risk with aggregate wealth implies the wrong sign to match the observed prices of prepayment risk. The price of risk is better explained by a kernel based on MBS market‐wide specific risk, consistent with the specialized arbitrageur hypothesis.     

The Cross-Section of Volatility and Expected Returns

We examine the pricing of aggregate volatility risk in the cross‐section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book‐to‐market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.