Stock Market Returns and Consumption

56 Pages Posted: 24 Jan 2018 Last revised: 18 Feb 2018

See all articles by Marco Di Maggio

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Kaveh Majlesi

Lund University; Research Institute of Industrial Economics (IFN); IZA Institute of Labor Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 17, 2018

Abstract

This paper employs Swedish data containing security level information on households' stock holdings to investigate how consumption responds to changes in stock market returns. We exploit households’ portfolio weights in previous years as an instrument for actual capital gains and dividends payments. We find that unrealized capital gains lead to a marginal propensity to consume (MPC) of 13 percent for the bottom 50% of the wealth distribution but a flat 5 percent for the rest of the distribution. We also find that households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are broadly consistent with near-rational behavior in which households optimize their consumption with respect to capital gains and dividends income as if they were separate sources of income.

Keywords: Capital gain, Dividend income, Consumption, Near-rational behavior

JEL Classification: E21, D15, G12

Suggested Citation

Di Maggio, Marco and Kermani, Amir and Majlesi, Kaveh, Stock Market Returns and Consumption (February 17, 2018). Available at SSRN: https://ssrn.com/abstract=3103538 or http://dx.doi.org/10.2139/ssrn.3103538

Marco Di Maggio

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani (Contact Author)

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kaveh Majlesi

Lund University ( email )

Box 117
Lund, S221 00
Sweden

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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