Consumption, asset wealth, equity premium, term spread, and flight to quality. (11th November 2019)

• Record Type: Journal Article
• Authors: Costantini, Mauro; Sousa, Ricardo M.
• Is Part Of: European financial management. Volume 26:Number 3(2020:Jun.)
• Page Start: 778
• Page End: 807
• Publication Date: 2019-11-11
• Subjects: asset wealth -- consumption -- flight to quality -- labor income -- panel data -- term premium; Finance -- European Union countries -- Periodicals; International finance -- Periodicals; Corporations -- European Union countries -- Finance -- Periodicals; 332.094
• DOI: 10.1111/eufm.12243
• Languages: English
• ISSNs: 1354-7798

Abstract

Abstract: We link transitory deviations of consumption from its equilibrium relationship with aggregate wealth and labor income to equity returns on the one hand, and to two characteristics of bond investors—the premium demanded to hold long‐term assets, and "flight to quality" behavior—on the other hand. Using a panel of 10 euro area countries over the period 1984Q1–2017Q4, we show that a rise in the consumption–wealth ratio predicts both higher equity returns and the future term spread, while a fall in the consumption–wealth ratio explains a large fraction of the rise in the spread between the "risky" and the "safe‐haven" bond.