Abstract :
If assetreturnsarepredictable,thenrationalexpectationsandthearithmeticofbudget
constraintstogetherimplythatthesepredictablechangesinreturnsshouldaffect
current consumption.Thispaperpresentsanewframeworklinkingconsumption,
income,andobservableassetstoexpectationsoffutureassetreturns.Relativeto
previous workonthistopic,theframeworkproposedinthispaperhasanumber
of advantagesincludingnotrelyingonuntestableassumptionsconcerningunobserv-
able variablesandnotrequiringestimationofunknownparameterstoarriveata
forecasting variable
