Human Capital, Household Capital and Asset Returns
Yu Ren, Yufei Yuan, Yang Zhang
Journal of Banking & Finance 42 (2014) 11–22
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Sousa (2010a) shows that the residuals from the common trend among consumption, financial wealth,
housing wealth and human capital, cday, can predict quarterly stock market returns better than cay from
Lettau and Ludvigson (2001), which considers aggregate wealth instead. In this paper, we use a more
appropriate proxy of human capital, which alleviates the potential correlation between the residuals
and the regressors and makes the estimation more precise. In addition, we extend housing wealth to
household capital by taking durable goods into consideration. The new predictor is proposed accordingly.
Empirically, we find that our predictor is superior to the other alternatives.
JEL-Codes: E21 E44 D12
Keywords: Human capital Household capital Consumption-wealth ratio Asset returns