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Collateralizable wealth, asset returns, and systemic risk: international evidence

Sousa, Ricardo M. (2010) Collateralizable wealth, asset returns, and systemic risk: international evidence. In: Jawadi, Fredj and Barnett, William A., (eds.) Nonlinear Modeling of Economic and Financial Time-Series. International Symposia in Economic Theory and Econometrics (20). Emerald Group Publishing Limited, Bingley, UK, pp. 1-27. ISBN 9780857244895

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Identification Number: 10.1108/S1571-0386(2010)0000020006

Abstract

Purpose – The purpose of this chapter is to assess the role of collateralizable wealth and systemic risk in explaining future asset returns. Methodology/approach – To test this hypothesis, the chapter uses the residuals of the trend relationship among housing wealth and labor income to predict both stock returns and government bond yields. Specifically, it shows that nonlinear deviations of housing wealth from its cointegrating relationship with labor income, hwy, forecast expected future returns. Findings – Using data for a set of industrialized countries, the chapter finds that when the housing wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner and (ii) if, however, investors perceive the increase in government bond returns as signaling a future rise in taxes or a deterioration of public finances, then they interpret the fall in the housing wealth-to-income ratio as a fall in future bond premia. Finally, this work shows that the occurrence of crisis episodes amplifies the transmission of housing market shocks to financial markets. Originality/value of chapter – These findings are novel. They also open new and challenging avenues for understanding the dynamics of the relationship between the housing sector, stock market and government bond developments, and the banking system.

Item Type: Book Section
Official URL: http://www.emeraldinsight.com/
Additional Information: © 2010 Emerald Group Publishing Limited
Divisions: Economics
Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 25 Apr 2014 10:53
Last Modified: 20 Jun 2021 01:10
URI: http://eprints.lse.ac.uk/id/eprint/56571

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