Asset Returns Under Model Uncertainty: Eveidence from the euro area, the U.K and the U.S

The goal of thes paper is to analyze predictability of future asset returns in the context of model uncertainty. Using data for the euro area, the US and the U.K., we show that one can improve the forecasts of stock returns using a Bayesian Model Averaging (BMA) approach, and there is a large amount of model uncertainty. The empirical evidence for the euro area suggests that several macroeconomic, financial and macro-financial variables are consistently among the most prominent determinants of risk premium. As for the U.S, only a few number of predictors play an important role. In the case of the UK, future stock returns are better forecasted by financial variables. These results are corroborated for both the M-open and the M-closed perspectives and in the context of "in-sample" and "out-of-sample" forescating. Finally, we highlight that the predictive ability of the BMA framework is stronger at longer periods, and clearly outperforms the constant expected returns and the autoregressive benchmark models.stock returns, model uncertainty, Bayesian Model Averaging

Expectations, Shocks, and Asset Returns

I use the consumer’s budget constraint to derive a relationship between stock market returns, the residuals of the trend relationship among consumption, aggregate wealth, and labour income, cay, and three major sources of risk: future changes in the housing consumption share, cr, future labour income growth, lr, and future consumption growth, lrc. Using a VAR, I compute measures of expected and unexpected long-run changes of the major determinants of asset returns and find that: (i) cay, cday, expected lr, cr, lrc and expected long-run changes in ex-ante real returns, lrret, strongly forecast future asset returns; (ii) unexpected lrc and unexpected lrret contain some predictive power for asset returns; (iii) unexpected lr and unexpected cr do not predict future asset returns. One can, therefore, use the intertemporal budget constraint and the forecasting properties of an informative VAR to generate the predictability of many economically motivated variables developed in the literature on asset pricing. The framework presented is sufficiently flexible to accommodate the implications of a wide class of optimal models of consumer behaviour without imposing a functional form on preferences.expectations, shocks, asset returns, wealth, income, consumption, housing share.

Consumption, (Dis) Aggregate Wealth and Asset Returns

In this work, we analyse the importance of disaggregation of wealth into main components (financial and housing wealth). We show, from the consumer´s intertemporal budget constraint, that the residuals of the trend relationship among consumption, financial wealth, housing wealth and labor income (summarized by the variable cday) should help to predict U.K quarterly asset returns, and to provide better forecasts than a variable like cay from Lettan and Ludvigson (2001), which considers aggregate wealth instead. Using a sample for the U.K. for the period 1975:Q1 - 2003:Q4, we also find that: (i) financial wealth effects are significantly different from housing wealth efects; (ii) changes in financial wealth are mainly transitory, while changes in housing wealth are better understood as permanent; (iii) the relationship among consumption, (dis)aggregate wealth and labor income was relatively stable over time; (iv) consumption doesn´t react asymmetrically to positive and negative financial (or housing) wealth shocks.financial wealth, housing wealth, consumption, expected returns.

Wealth Effetcs on Consumption: Evidence from the euro area

This paper estimates the wealth effects on consumption in the euro area as a whole. I show that: (i) financial wealth effects are relatively large and statistically significant; (ii) housing wealth effects are virtually nil and not significant; (iii) consumption growth exhibits strong persistence and responds sluggishly to shocks; and (iv) the immediate response of consumption to wealth is substantially different from the long-run wealth effects. By disaggregating financial wealth into its major components, the estimates suggest that wealth effects are particularly large for currency and deposits, and shares and mutual funds. In addition, consumption seems to be very responsive to financial liabilities and mortage loans.Consumption, Housing Wealth, Financial Wealth.

Monochromatic Clique Decompositions of Graphs

Let $G$ be a graph whose edges are coloured with $k$ colours, and $\mathcal H=(H_1,\dots , H_k)$ be a $k$-tuple of graphs. A monochromatic $\mathcal H$-decomposition of $G$ is a partition of the edge set of $G$ such that each part is either a single edge or forms a monochromatic copy of $H_i$ in colour $i$, for some $1\le i\le k$. Let $\phi_{k}(n,\mathcal H)$ be the smallest number $\phi$, such that, for every order-$n$ graph and every $k$-edge-colouring, there is a monochromatic $\mathcal H$-decomposition with at most $\phi$ elements. Extending the previous results of Liu and Sousa ["Monochromatic $K_r$-decompositions of graphs", Journal of Graph Theory}, 76:89--100, 2014], we solve this problem when each graph in $\mathcal H$ is a clique and $n\ge n_0(\mathcal H)$ is sufficiently large.Comment: 14 pages; to appear in J Graph Theor

Collateralizable Wealth, Asset Returns, and Systemic Risk: International Evidence

I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the 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; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.stock returns; government bond yields; systemic crises.

Nonuniversality of weak synchronization in chaotic systems

We show that the separate properties of weak synchronization (WS) and strong synchronization (SS), reported recently by Pyragas [K. Pyragas, Phys. Rev. E, 54, R4508 (1996)], in unidirectionally coupled chaotic systems, are not generally distinct properties of such systems. In particular, we find analytically for the tent map and numerically for some parameters of the circle map that the transition to WS and SS coincide.Comment: 3 pages (Revtex) and 3 figures (postscript) To appear in Phys. Rev. E (Rapid Communications

A Growth model for DNA evolution

A simple growth model for DNA evolution is introduced which is analytically solvable and reproduces the observed statistical behavior of real sequences.Comment: To be published in Europhysics Letter