The Dynamic Interplay of Consumption and Wealth: A Systems Analysis of Horizon-Specific Effects on Chinese Stock Returns
Year: 2025
Type: article
Abstract: This paper investigates the predictability of stock returns in the Chinese market through the lens of consumption–wealth dynamics within a broader financial system. We focus on two key state variables derived from modern consumption-based asset pricing models: the ratio of log surplus consumption (scr), from the habit-formation framework, and the log consumption–wealth ratio (cay), from the long-run cointegration framework. Using quarterly data from the CSI 300 index between 2012Q1 and 2018Q4, our system-based analysis reveals a horizon-dependent pattern of predictability. The results show that scr is a strong short-term predictor of excess stock returns, reflecting cyclical changes in risk aversion, whereas cay demonstrates superior predictive power over mid- to long-term horizons, consistent with its role as a proxy for long-run expectations. Interestingly, combining scr and cay does not improve predictive performance, suggesting that the economic mechanisms they capture are distinct rather than complementary in the Chinese market. These findings provide evidence on how interconnected macro-financial variables shape stock return dynamics, highlighting the importance of considering temporal horizons when modeling financial systems.
Source: Systems
Institution: Shenzhen University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $2,896
OpenAlex ID: W4416772218
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