Human capital, household capital and asset returns

Sousa (2010a) shows that the residuals from the common trend among consumption, financial wealth, housing wealth and human capital, cday, can predict quarterly stock market returns better than cay from Lettau and Ludvigson (2001), which considers aggregate wealth instead. In this paper, we use a more appropriate proxy of human capital, which alleviates the potential correlation between the residuals and the regressors and makes the estimation more precise. In addition, we extend housing wealth to household capital by taking durable goods into consideration. The new predictor is proposed accordingly. Empirically, we find that our predictor is superior to the other alternatives.