The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street / Hanno Lustig, Stijn Van Nieuwerburgh.

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Lustig, Hanno

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11564.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

G1 - General Financial Markets

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Abstract: We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
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Previous	nber w11561 Is Academic Science Driving a Surge in Industrial Innovation? Evidence from Patent Citations /	nber w11562 The Incredible Volcker Disinflation /	nber w11563 From World Banker to World Venture Capitalist: US External Adjustment and the Exorbitant Privilege /	nber w11564 The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street /	nber w11565 Collateral Damage: Trade Disruption and the Economic Impact of War /	nber w11566 The Economics of Workaholism: We Should Not Have Worked on This Paper /	nber w11567 Biology as Destiny? Short and Long-Run Determinants of Intergenerational Transmission of Birth Weight /	Next

August 2005.

We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. The market portfolio includes financial and human wealth. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. This accounting procedure only depends on the agent's willingness to substitute consumption over time, not her consumption risk preferences. We find that innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution. The evidence from the cross-section of stock returns suggests that the market return we back out of aggregate consumption innovations is a better measure of market risk than the return on the stock market.