Stock Market Returns and Consumption

58 Pages Posted: 12 Mar 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

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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 13 percent for the bottom 50% of the wealth distribution, but a flat 5 percent for the rest of the 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. IZA Discussion Paper No. 11357, Available at SSRN: https://ssrn.com/abstract=3137487

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

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

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Amir Kermani

University of California, Berkeley ( email )

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

National Bureau of Economic Research (NBER) ( email )

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Kaveh Majlesi

Lund University ( email )

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Research Institute of Industrial Economics (IFN) ( email )

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Sweden

IZA Institute of Labor Economics ( email )

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