The skewness, and the existence of rare but violent explosions in prices, coupled with a high degree of price autocorrelation This paper applies the standard rational expectations competitive storage model to the study of thirteen commodities. Copyright The American Finance Association 2001. 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.
Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be xpressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income.
COMMODITY RISK ENGINE PLUS
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. 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. 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. This paper studies the role of fluctuations in the aggregate consumption-wealth ratio for predicting stock returns.
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