Munich Personal RePEc Archive

Consumption and Expected Asset Returns without Assumptions About Unobservables

Whelan, Karl (2006): Consumption and Expected Asset Returns without Assumptions About Unobservables.

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Abstract

If asset returns are predictable, then rational expectations and the arithmetic of budget constraints together imply that these predictable changes in returns should affect current consumption. This paper presents a new framework linking consumption, income, and observable assets to expectations of future asset returns. Relative to previous work on this topic, the framework proposed in this paper has a number of advantages including not relying on untestable assumptions concerning unobservable variables and not requiring estimation of unknown parameters to arrive at a forecasting variable.

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