Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/141449
Authors: 
Kraft, Holger
Munk, Claus
Weiss, Farina
Year of Publication: 
2016
Series/Report no.: 
SAFE Working Paper Series 139
Abstract: 
We show that the net corporate payout yield predicts both the stock market index and house prices and that the log home rent-price ratio predicts both house prices and labor income growth. We incorporate the predictability in a rich life-cycle model of household decisions involving consumption of both perishable goods and housing services, stochastic and unspanned labor income, stochastic house prices, home renting and owning, stock investments, and portfolio constraints. We find that households can significantly improve their welfare by optimally conditioning decisions on the predictors. For a modestly risk-averse agent with a 35-year working period and a 15-year retirement period, the present value of the higher average life-time consumption amounts to roughly $179,000 (assuming both an initial wealth and an initial annual income of $20,000), and the certainty equivalent gain is around 5.5% of total wealth (financial wealth plus human capital). Furthermore, every cohort of agents in our model would have benefited from applying predictor-conditional strategies along the realized time series over our 1960-2010 data period.
Subjects: 
return predictability
human capital
housing
investments
welfare
JEL: 
G11
D91
D14
Document Type: 
Working Paper

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