Predicting stock market movements with a time-varying consumption-aggregate wealth ratio

摘要

We develop a time-varying measure of cay (cay(TVP)) using time-varying cointegration, and then compare the predictive ability of Cay(TVP) with cay and a Markov-switching cay (cay(MS)) for excess stock returns and volatility in the US over the period 1952:Q2-2015:Q3, using a k-th order nonparametric causality-in-quantiles test. We find that time-varying cointegration exists between consumption, asset wealth, and labor income. In addition, while there is no evidence of predictability of volatility of excess returns from cay, cay(MS), or Cay(TVP), they tend to act as strong predictors of stock returns, with cay(TVP) being important during the bearish phases of the equity market.