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Stock Market Returns and Consumption

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  • MARCO DI MAGGIO
  • AMIR KERMANI
  • KAVEH MAJLESI

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 of 23% for the bottom 50% of the wealth distribution and about 3% for the top 30% of the wealth distribution. Household 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.

Suggested Citation

  • Marco Di Maggio & Amir Kermani & Kaveh Majlesi, 2020. "Stock Market Returns and Consumption," Journal of Finance, American Finance Association, vol. 75(6), pages 3175-3219, December.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:6:p:3175-3219
    DOI: 10.1111/jofi.12968
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    3. Cui, Wei & Sterk, Vincent, 2018. "Quantitative easing," LSE Research Online Documents on Economics 90874, London School of Economics and Political Science, LSE Library.
    4. Garbinti, Bertrand & Lamarche, Pierre & Savignac, Frédérique & Lecanu, Charlélie, 2020. "Wealth effect on consumption during the sovereign debt crisis: households heterogeneity in the euro area," Working Paper Series 2357, European Central Bank.
    5. Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2020. "Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    6. Fergus Cumming, 2019. "Mortgage Cash-flows and Employment," Discussion Papers 1922, Centre for Macroeconomics (CFM).
    7. Asger Lau Andersen & Emil Toft Hansen & Niels Johannesen & Adam Sheridan, 2020. "Consumer Responses to the COVID-19 Crisis: Evidence from Bank Account Transaction Data," CEBI working paper series 20-18, University of Copenhagen. Department of Economics. The Center for Economic Behavior and Inequality (CEBI).
    8. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    9. Samuel M. Hartzmark & David H. Solomon, 2020. "Reconsidering Returns," NBER Working Papers 27380, National Bureau of Economic Research, Inc.
    10. Cui, Wei & Sterk, Vincent, 2018. "Quantitative Easing," CEPR Discussion Papers 13322, C.E.P.R. Discussion Papers.
    11. Benjamin Loos & Steffen Meyer & Michaela Pagel, 2020. "The Consumption Effects of the Disposition to Sell Winners and Hold Losers," NBER Working Papers 26668, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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