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RFS Advance Access published online on September 18, 2006
Review of Financial Studies, doi:10.1093/rfs/hhl035
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Copyright © The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies.

Article

The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street

Hanno Lustig 1 * and Stijn Van Nieuwerburgh 2
1 Dept. of Economics, UCLA, Box 951477 Los Angeles, CA 90095-1477 and NBER
2 Dept. of Finance, NYU, 44 West Fourth Street, Suite 9-190, New York, NY 10012 and NBER

* To whom correspondence should be addressed.
Hanno Lustig, E-mail: hlustig{at}econ.ucla.edu


  Abstract
We use a standard single-agent model to conduct a simple consumption growth accounting exercise. Consumption growth is driven by news about current and expected future returns on the market portfolio. We impute the residual of consumption growth innovations that cannot be attributed to either news about financial asset returns or future labor income growth to news about expected future returns on human wealth, and we back out the implied human wealth and market return process. Innovations in current and future human wealth returns are negatively correlated with innovations in current and future financial asset returns, regardless of the elasticity of intertemporal substitution.

The authors would like to thank the editor, Tobias Moskowitz, two very helpful referees, as well as Andy Atkeson, Raffaella Giacomini, Robert Hall, Chad Jones, Martin Lettau, Sydney Ludvigson, Alex Michaelides, Laura Veldkamp, and the participants of the UCLA brown bag lunch, the NYU macro-finance reading group and macrolunch, seminar participants at the University of California at Berkeley, Stanford, USC, Pompeu Fabra, the LSE, the Bank of England, the University of California at San Diego, the Stockholm Institute for Financial Research, the University of Frankfurt, and the participants of the 2005 SED meetings, the 2005 NBER Summer Institute Asset Pricing Meetings, and the 2006 AEA meetings. We are especially grateful to John Campbell, Lars Peter Hansen and Francis Longstaff for detailed comments. We have benefited from conversations with John Heaton and Tano Santos about related ideas. This material is based upon work supported by the National Science Foundation under Grant No 0550910.


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