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On the Real-Time Forecasting Ability of the Consumption-Wealth Ratio
Lettau and Ludvigson (2001a) show that the consumption-wealth ratio—the error term from the cointegration relation among consumption, net worth, and labor income—forecasts stock market returns out of sample. In this paper, we reexamine their evidence using real-time data. Consistent with the early authors, we find that consumption and labor income data are subject to substantial revisions, which reflect (1) incorporating new information or methodologies and (2) reducing noise. Consequently, in contrast with the results obtained from the current vintage, the out-of-sample forecasting power of the consumption-wealth ratio is found to be negligible in real time.