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Wealth-to-Income Ratio and Stock Market Movements: Evidence from a Nonparametric Causality Test

Author

Listed:
  • Mehmet Balcilar

    (Eastern Mediterranian University, Montpellier Business School and University of Pretoria)

  • Rangan Gupta

    (University of Pretoria)

  • Ricardo M. Sousa

    (University of Minho and LSE Alumni Association)

  • Mark E. Wohar

    (University of Nebraska-Omaha and Loughborough University)

Abstract
We use a nonparametric causality-in-quantiles test to analyze the predictive ability of the wealth-to-income ratio (wy) for excess stock returns and their volatility. Our results reveal that the wealth-to-income ratio is nonlinearly related with excess stock returns, and hence, results from linear Granger causality tests cannot be deemed robust. When we apply the nonparametric causality-in-quantiles test, we find that the wealth-to-income ratio can predict excess stock returns over the majority of the conditional distribution, with the exception being the extreme ends, i.e. when the market is in deep bear or bull phases. However, the wealth-to-income ratio has no predictability for the volatility of excess stock returns.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Ricardo M. Sousa & Mark E. Wohar, 2017. "Wealth-to-Income Ratio and Stock Market Movements: Evidence from a Nonparametric Causality Test," Working Papers 201731, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201731
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    Cited by:

    1. Balcilar, Mehmet & Gupta, Rangan & Sousa, Ricardo M. & Wohar, Mark E., 2021. "Linking U.S. State-level housing market returns, and the consumption-(Dis)Aggregate wealth ratio," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 779-810.
    2. Rangan Gupta & Hardik A. Marfatia & Eric Olson, 2020. "Effect of uncertainty on U.S. stock returns and volatility: evidence from over eighty years of high-frequency data," Applied Economics Letters, Taylor & Francis Journals, vol. 27(16), pages 1305-1311, September.
    3. Mauro Costantini & Ricardo M. Sousa, 2020. "Consumption, asset wealth, equity premium, term spread, and flight to quality," European Financial Management, European Financial Management Association, vol. 26(3), pages 778-807, June.

    More about this item

    Keywords

    stock returns; volatility; nonparametric causality-in-quantiles test;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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