Foregone Consumption and Return-Chasing Investments

52 Pages Posted: 2 Aug 2019 Last revised: 16 Mar 2020

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Ben Charoenwong

National University of Singapore - Department of Finance

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Date Written: March 15, 2020

Abstract

We show individuals investments chase stock index returns and are financed by foregoing consumption, even after controlling for individual-account level portfolio income effects and other high dimensional fixed effects. This effect only exists for positive stock index returns with no effects for negative returns and are driven by the most salient stock index rather than other stock indices that are more representative of total stock market returns. To finance the investment, the foregone consumption occurs in the week after stock index returns are realized and are more pronounced for luxuries than necessary goods, and durables versus non-durables and services. Contrary to predictions from rational models of investor behavior with financial constraints, wealthy and more liquid accounts exhibit a larger return-chasing investment and foregone consumption, more consistent with theories of extrapolative expectations and loss aversion.

Keywords: Consumption, Loss Aversion, Return Chasing, Extrapolative Expectations, Household Portfolio Allocation

JEL Classification: E21, D14, D15, G41

Suggested Citation

Agarwal, Sumit and Charoenwong, Ben and Ghosh, Pulak, Foregone Consumption and Return-Chasing Investments (March 15, 2020). Available at SSRN: https://ssrn.com/abstract=3428811 or http://dx.doi.org/10.2139/ssrn.3428811

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Ben Charoenwong (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/519-ben

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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