Stock Market Returns and Consumption

54 Pages Posted: 24 Jan 2018 Last revised: 6 May 2020

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 on households' stock holdings to investigate how consumption responds to changes in stock market returns. We instrument the actual capital gains and dividend payments with past portfolio weights. Unrealized capital gains lead to a marginal propensity to consume (MPC) of 23% for the bottom 50% of the wealth distribution and about 3% for the top 30% of the wealth distribution. Households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are consistent with households treating capital gains and dividends as 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). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3103538 or http://dx.doi.org/10.2139/ssrn.3103538

Marco Di Maggio

Harvard Business School ( email )

Soldiers Field
Baker Library 265
Boston, MA 02163
United States

HOME PAGE: http://https://www.hbs.edu/faculty/Pages/profile.aspx?facId=697248

National Bureau of Economic Research (NBER) ( email )

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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 )

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Cambridge, MA 02138
United States

Kaveh Majlesi

Lund University ( email )

Box 117
Lund, SC Skane 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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