Aggregate Consumption Spending, the Stock Market, and Asymmetric Error Correction

Quantitative Finance, Vol. 4, pp. 191-198, 2004

Posted: 7 Mar 2006

See all articles by Lonnie K. Stevans

Lonnie K. Stevans

Hofstra University - Frank G. Zarb School of Business

Abstract

In this study, we show how changes in wealth resulting from unanticipated changes in the value of equity holdings begin a process whereby households alter consumption growth in order to close the gap between actual and target spending. Because of changing uncertainty or equity price volatility over the stock market cycle, we found the time path of this adjustment to exhibit near random walk behavior during stock market downturns. Conversely, during "boom" periods, e.g. when the value of equities held by households was greater than the threshold, the growth in consumer spending was quick to eliminate the disparity between actual and target spending.

Keywords: asymmetric error correction, random walk, cointegration, aggregate consumption

JEL Classification: C15, C22, D12, E44

Suggested Citation

Stevans, Lonnie K., Aggregate Consumption Spending, the Stock Market, and Asymmetric Error Correction. Quantitative Finance, Vol. 4, pp. 191-198, 2004, Available at SSRN: https://ssrn.com/abstract=887845

Lonnie K. Stevans (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

Department of IT/QM
134 Hofstra University
Hempstead, NY 11549
United States
516-463-5375 (Phone)

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

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