Wealth Hypothesis Research Articles

Do House Prices Affect Consumption? A Re‐assessment of the Wealth Hypothesis

This paper revives the debate in the literature about the relationship between house prices and consumption by exploring conflicting results in the UK. Campbell and Cocco () find that old owners benefit most from a house price increase and young renters least, confirming the so‐called wealth hypothesis. In contrast, Attanasio et al. () find that house prices have the same impact on consumption across age groups. We rule out several potential explanations related to data construction, and provide evidence that the functional form can reconcile the conflicting results in the two papers.

Do House Prices Affect Consumption? A Re-Assessment of the Wealth Hypothesis

This paper undertakes a comparison exercise to disentangle what drives the opposite findings regarding the effect of house prices on consumption documented in two papers using the same data set for the UK. On the one hand, Campbell and Cocco (2007) find that old owners are the most benefited by a house price increase and young renters the least, confirming the so-called wealth hypothesis. On the other hand, Attanasio, Blow, Hamilton, and Leicester (2009) find that house prices have the same impact on consumption across age groups, consistent with the so-called common factor hypothesis. First, we confirm that the findings in both papers can be reproduced. Second, we rule out a number of potential reasons related to the basic data construction, and provide evidence that the functional form (i.e., an Euler equation of consumption vs. a reduced form life-cycle model) and not data aggregation considerations (household level data vs. synthetic cohort data) may be at the root of the conflicting results in the two papers. Our findings revive the debate of whether there is an effect of house prices on consumption.

Foreign direct investment and regulatory remedies for banking crises: Lessons from Japan

Can regulatory interventions alleviate financial crises? If so, which ones work? We draw inferences from the Japanese banking crisis of the 1990s using a hand-gathered database of bank loans gathered from original sources. Our results indicate that whereas risk-based capital infusions in Japan (similar to those following the 2009 Supervisory Capital Assessment Program (stress tests) in the US) were successful in stimulating aggregate lending by Japanese banks, earlier blanket infusions (comparable to the 2008 Troubled Asset Relief Program (TARP) in the US) were not effective. Moreover, changes in accounting rules in Japan that revalued bank assets (similar to the relaxation of mark-to-market requirements for banks in the US) did not increase aggregate Japanese bank lending, but rather reallocated it. Capital constraints during the crisis also induced many Japanese banks to close their overseas branches and switch their charters from international to domestic. This endogenous charter switch reversed the process of foreign direct investment (FDI) for many Japanese banks. Therefore we use the Japanese banking crisis as a natural experiment to test FDI theories and find empirical support for the relative access hypothesis, but not for the industrial organization approach or for the relative wealth hypothesis.

Asset/Liability Management for the Private Client

Time-sensitive risk aversion is the key to overcoming the distortions caused by the simplistic approach to discounting liabilities used in traditional asset/liability management. By using the discretionary wealth hypothesis and an equilibrium term structure, private wealth managers can quantify their clients’ risk tolerances and offer optimal solutions in a multiperiod framework.

Personal asset/liability management: using the discretionary wealth hypothesis within an equilibrium term structure

Personal asset/liability management: using the discretionary wealth hypothesis within an equilibrium term structure

Happiness due to Consumption and its Increases, Wealth and Status

This paper departs from the standard open-economy Ramsey model and introduces additional concerns for wealth, status and Easterlin's (2001) hypothesis that consumption changes, in particular increases, are important and not only the level. These extensions induce first of all interior steady states, which are lacking in the standard model, multiple steady states (separated by thresholds leading to history dependence) and limit cycles. The existence of cyclical consumption patterns could provide a so far ignored source for real business cycles. Surprisingly, introducing status conferred by private wealth or conspicuous consumption has no effect despite the involved externalities (the outcomes are observationally equivalent) as long as the social influence associated with the status externalities remains moderate.

Clarifications on “Beyond Markowitz”

The author addresses several specific issues raised about the Wealth Allocation Framework in two articles: Horvitz and Wilcox, and Fowler &amp; de Vassal. He points out that a careful reading of both articles reveals that several of the questions raised about the Wealth Allocation Framework stem from the single incorrect assumption that the risk allocation buckets are silos and independent of each other. After having corrected this misconception, the author in turn addresses several of the objections raised in the two articles. Finally, he concludes that both the Discretionary Wealth Hypothesis and the Holistic Optimization of Goals approaches are consistent with the Wealth Allocation Framework and can (under certain restrictive assumptions) be viewed as special cases of this Framework. <b>TOPICS:</b>Portfolio theory, portfolio construction, in wealth management, risk management

Risk and Return Around Bond Rating Changes: New Evidence From the Spanish Stock Market

Abstract: This study analyzes the effect of corporate bond rating changes on stock prices in the Spanish stock market. We explore their effects on excess of returns and systematic risk. Rating changes by Moody's, Standard and Poor's and FitchIBCA are analyzed. On an efficient market, these changes will only have some effect if they contain some new information or if they are associated to a redistribution of wealth between shareholders and bondholders. We use an extension of the event study dummy approach. Our results support the redistribution of wealth hypothesis in the abnormal returns behavior. We also find that changes in both directions cause a rebalancing effect in the total risk of the firm, with significant reductions on their systematic component.

Risk management: Survival of the fittest

This paper responds to three questions not well answered for many students of finance: (1) How do investors choose where to aim on an efficient frontier of trade-offs between portfolio expected return and risk? (2) What do investors do when return variance is inadequate as a summary of risk? (3) How can investors take into account the need to avoid interim shortfalls on the way to a more distant goal? To have great impact, the answers must be simple enough to be carried in the heads of practical investors. Since vivid examples help, the last part of this paper examines five cases: the option income fund, extreme CPPI (Constant Proportion Portfolio Insurance), the Long-Term Capital Management case, the Enron case and split capital trust funds. In each case, the discretionary wealth hypothesis is used, a reformulation of what are sometimes known as fractional Kelly strategies, to pinpoint the easily remedied blind spots that led to unexpected disappointments.

Risk and Returns around Bond Rating Changes: New Evidence from the Spanish Stock Market

This study analyzes the effect of corporate bond rating changes on stock prices in the Spanish stock market. We explore their effects on excess of returns and systematic risk. Rating changes by Moody's, Standard and Poor's and FitchIBCA are analyzed. On an efficient market, these changes will only have some effect if they contain some new information or if they are associated to a redistribution of wealth between shareholders and bondholders. We use an extension of the event study dummy approach. Our results support the redistribution of wealth hypothesis in the abnormal returns behavior. We also find that changes in both directions cause a rebalancing effect in the total risk of the firm, with significant reductions on their systematic component.

Harry Markowitz and the Discretionary Wealth Hypothesis

In his 1959 book, Portfolio Selection, Harry Markowitz showed how return mean and variance combine to determine the expected long-term growth rate of capital. But maximization of that growth rate seems to fit the risk preferences of only a narrow range of aggressive investors unconcerned about shortfalls. The growth rate goal may in fact be generalized to both conservative and aggressive investors by mapping the distribution of returns on total wealth to returns on discretionary wealth. The definition of risk may be broadened to include return skew and kurtosis when required, to fully encompass the concept of downside risk. The resulting change in frame of reference extends Markowitz9s criterion to many practical investment decisions involving maximizing long-run wealth while controlling the probability of shortfalls along the way.

Insider Trading Around ESOP Announcements: Wealth Effect vs. Control Effect

Following the enactment of ERISA (Employee Retirement Income Security Act) in 1974, employee stock ownership plans (ESOPs) have become a popular form of employee compensation among U.S. companies. The introduction of an ESOP has important implications for management interest that should encourage insiders buying activity. This paper documents that unusual insider buying activity has indeed resulted from the introduction of an ESOP. Further we examine two competing explanations, the wealth hypothesis and the control hypothesis, for the increase in insiders buying activity. We conclude that insiders buying activity is primarily motivated by control considerations.

Share Repurchases, Dividends, and Executive Options: Empirical Evidence from Finland

This paper reports empirical results on the determinants of the authorization decision for share repurchases and dividends in Finland. We use a data set with precise data on share repurchases as well as characteristics for the programs. Contrary to the U.S., we use a data set where 41% of the options are dividend protected, which allows us to seprate between the option funding and hypothesis for the choice of the distribution method. We find that tax effects in terms of higher foreign ownership is the main determinant for share repurchases in Finland. We also find evidence in support of both the signalling and agency cost hypotheses for cash distributions, especially in the case of share repurchases. Finally, we find a significant difference between companies with or without dividend protected options. When options are dividend protected, the relationship between dividend distributions and the scope of the options program turns to a significantly positive one instead of the negative one documented on U.S. data. This gives some support for the substitution/managerial wealth hypothesis as a determinant for the choice of the distribution method.

Retirement Saving in Japan: With Emphasis on the Impact of Social Security and Retirement Payments

In this paper, we apply Kazuo Sato's target wealth hypothesis to saving for life after retirement and analyze the impact of social security wealth, retirement payments, permanent income, and other factors on people's retirement saving using micro data from the Survey of Social Security and Self Help, which was conducted in 1996 by the Japan Institute of Life Insurance. Our findings provide strong confirmation of the target wealth hypothesis and of the life cycle model and imply that the Japanese take account of their future social security benefits and retirement payments, their permanent income, etc., when saving for life after retirement. J. Japan. Int. Econ., June 2001, 15(2), pp. 131–159. Graduate School of Economics, and Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki, Osaka, 567-0047, Japan. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: D12, D91, E21, H55.

International acquisitions in the united states: Evidence from returns to foreign bidders

AbstractThis paper provides evidence on the minimally explored topic of abnormal returns earned by stockholders of foreign bidders seeking to acquire a target firm in the USA. Four sources of influence on abnormal returns are identified: changes in net wealth of the bidder associated with changes in exchange rates; possible value‐destroying managerial discretionary behavior by bidders with excess cash flows, as suggested by Jensen; comparative advantages for foreign bidders domiciled in relatively favorable tax jurisdictions; ownership status of the target, i.e. whether the target is an entire firm and whether it involves divested assets. The study includes 77 firms from 10 countries. The results show that stockholders of foreign bidders earn significant, negative abnormal returns surrounding the announcement of an acquisition in the USA. These abnormal returns become increasingly negative over the 15 days after the announcement of the acquisition, indicating that more information about the acquisition is revealed to investors subsequent to the initial announcement. Cross‐sectional regressions indicate that relative exchange rates and cash positions explain variation in abnormal returns. A decline in the value of the dollar increases abnormal returns for the foreign bidder, thus supporting the net wealth hypothesis. The results also show that cash‐rich foreign firms tend to enjoy higher abnormal returns when making acquisitions in the USA. The result provides support for the Froot and Stein cash‐constrained hypothesis rather than for Jensen's free‐cash‐flow theory.

AGGREGATIVE AND SECTORAL HYPOTHESES ON THE DEMAND FOR MONEY: COMPARATIVE TESTS FOR THE BUSINESS SECTOR*

MONEY DEMAND FUNCTIONS, as used in macroeconomic theory and in applications to monetary policy, have their theoretical underpinnings in models of portfolio optimization for the individual wealth holder. The use of these functions in an aggregative framework, in the absence of specific premises regarding aggregation, suggests the assumption that all cash holders respond in a uniform way to the same set of variables. Such an assumption is open to question. Separable categories of decision makers can be defined and cash holding behavior may vary across categories. For instance, households, non-financial firms and financial institutions may all determine their demands for cash according to the fundamental principles embodied in the standard portfolio models, but attempts to capture this behavior in money demand functions could properly involve the use of different explanatory variables and structural relations for each sector. Put another way, predictions of the aggregate amount of money demanded based on separate functions for each sector could be more accurate than those based on a single aggregative function. Little attention has been paid to this problem in the extensive literature on the demand for money. The small number of hypotheses that are widely used to generate aggregate money demand functions suggests that it is not difficult to evaluate the empirical importance of the problem. That is, functions considered useful at the aggregate level can be tested at the sectoral level. As well as subjecting these hypotheses to the standard statistical tests on data for a particular sector, their performance can be compared to that of money demand functions that reflect specific sectoral characteristics. The thesis abstracted here reports on such an analysis for the non-financial business sector. Quarterly data on manufacturing corporations in the U.S., from 1947 to 1963, were for the study. A priori suspicions turned out to be justified. Two forms of money demand functions widely accepted at the aggregate level, those based on the permanent income hypothesis and the wealth hypothesis, performed badly on this set of data. The third and simplest of the commonly used hypotheses, that money demand depends on income and the interest rate, fared somewhat better, but not as well as those functions that incorporated additional hypotheses specifically relevant to the firm. The latter hypotheses are based on the argument that the portfolio models normally used to determine optimal cash balances involve an array of assets that is too narrowly defined to represent the firm's behavior. The firm's 'portfolio' involves a complex balance sheet. Thus, the rates of return on assets and liabilities other than the standard marketable ones (e.g., accounts receivable and payable, inventories, bank loans and bonded debt), along with other variables that relate the firm's cash flow to its income flow, are considered in the analysis as well.

The Demand for Money by Households in South Vietnam: The Evidence from Cross-Section Data

One of the most widely reviewed and tested hypotheses of contemporary economics Friedman's wealth hypothesis about the demand for money (1957a, pp. 18-19). In the language of consumption theory it also referred to as the goods hypothesis to suggest that money balances are a good and that, as the hypothesis requires, the stock of the balances held increases more than in proportion to wealth or income. The results of tests of the hypothesis have been varied. In this note we review the hypothesis and analyses of data relating to it and test it once again, using data from a 1964 sample survey of households in South Vietnam. These viewed over-all support the hypothesis; money balances per household rise more than in proportion to income per household in rural South Vietnam and in selected regions of South Vietnam. In an early explanation of the goods hypothesis by Friedman (1959a, pp. 525-26), money demand was said to be adjusted, from the holder's point of view, to the anticipated long-term levels of income and prices. Friedman (1959b, pp. 327-51) found support for the hypothesis in analyses of pre-World War II data for the United States, but Selden (1961, p. 484), reporting on results from post-World War II data, noted that some of his early regression equations performed poorly. The postwar rise in velocity (that is, the ratio of income to money balances), Selden says, is all the more puzzling because the major factor thought to be responsible for the earlier downward trend-advancing per capita real income . . .-has continued to operate since the end of the war. Meltzer (1963, p. 235), moreover, concluded from his analyses of prewar data that Friedman's conclusion about money as a luxury good relates to the particular definition of money that Friedman uses [that is, the broad

Investment in Man: An Economist's View

My plan is first to comment on the state of our knowledge about investments that people make in themselves and, then, to consider briefly the reluctance that we have in thinking about human wealth, and to give reasons why modern economists have shied away from it. I plan, then, to show how wholly new and important questions can be examined, once we acknowledge the role of human wealth, and how a number of big puzzles in our economic data may be solved. I venture to suggest a human wealth hypothesis and to note that estimates from two recent studies are consistent with it. It is a simple truth that people invest in themselves. They do it as individuals and as families and through their national and local communities. In mak-