Double Jeopardy: Households’ consumption responses to shocks in stock and mortgage markets

Abstract

Households reduce consumption following negative shocks to their stock holdings. Households also lower consumption following exogenous increases in mortgage debt payments. However, what happens when households face simultaneous adverse shocks in both the mortgage and stock markets, such as during the 2008 financial crisis? Using detailed Danish household data, we find that households exposed to both markets reduce consumption considerably more than households exposed to just one market. This is important, as we also demonstrate that households with high exposure to one market tend to have similarly high exposure to the other market. Finally, we find that these negative effects on consumption persist over time and discuss the underlying reasons behind our results.

Keywords: Mortgage choice; micro data; risk attitudes; stock market participation; consumption effects; financial crisis.

JEL Classification: G11, G50