Premium
Consumption, asset wealth, equity premium, term spread, and flight to quality
Author(s) -
Costantini Mauro,
Sousa Ricardo M.
Publication year - 2020
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12243
Subject(s) - economics , equity premium puzzle , equity (law) , bond , consumption (sociology) , monetary economics , term (time) , financial economics , econometrics , risk premium , finance , social science , sociology , political science , law , physics , quantum mechanics
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.