Wealth-to-income ratio, government bond yields and financial stress in the Euro Area

Abstract

I show that when the ratio of asset wealth to human wealth, wy, falls, investors become more exposed to idiosyncratic shocks and demand a higher government bond risk premium. Using data for the Euro Area as a whole and conditioning the forecasting ability of wy on the financial stress conditions, one is able to track better future time-variation in risk premium.

Keywords:

• wealth
• labour income
• government bond yields
• financial stress
• Euro Area

JEL Classification:

• E21
• E44
• D12