Dynamic Spending Responses to Wealth Shocks: Evidence from Quasi-lotteries on the Stock Market

45 Pages Posted: 13 Jul 2021

See all articles by Asger Lau Andersen

Asger Lau Andersen

University of Copenhagen - Department of Economics; CEBI; Danish Finance Institute

Niels Johannesen

University of Copenhagen

Adam Sheridan

University of Copenhagen

Multiple version iconThere are 3 versions of this paper

Date Written: July 6, 2021

Abstract

How much and over what horizon do households adjust their consumption in response to stock market wealth shocks? We address these questions using granular data on spending and stock portfolios from a large bank and exploiting lottery-like variation in gains across investors with similar portfolio characteristics. Consistent with the permanent income hypothesis, spending responses to stock market gains are immediate and persistent. The responses cumulate to a marginal propensity to consume of around 4% over a one-year horizon. The estimates differ substantially by household liquidity, but not by financial attention, as measured by the frequency of account logins.

Keywords: wealth shocks, household consumption, marginal propensity to consume, stock markets, permanent income hypothesis

JEL Classification: D12, G51, E21

Suggested Citation

Andersen, Asger Lau and Johannesen, Niels and Sheridan, Adam, Dynamic Spending Responses to Wealth Shocks: Evidence from Quasi-lotteries on the Stock Market (July 6, 2021). Available at SSRN: https://ssrn.com/abstract=3884380 or http://dx.doi.org/10.2139/ssrn.3884380

Asger Lau Andersen (Contact Author)

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

CEBI ( email )

Denmark

Danish Finance Institute ( email )

Niels Johannesen

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

Adam Sheridan

University of Copenhagen ( email )

Nørregade 10
Copenhagen, København DK-1165
Denmark

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