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Time-Varying Effects of Housing and Stock Returns on U.S. Consumption

Author

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  • Beatrice Simo-Kengne
  • Stephen Miller

    ()

  • Rangan Gupta
  • Goodness Aye

Abstract

This paper applies a time-varying parameter vector autoregressive approach to estimate the relative effects of housing and stock returns on the growth rate of US consumption over time. We use annual data from 1890 to 2012 and find that at the 1- and 2-year horizons and over time, generally the housing return positively affects consumption growth while the stock return negatively affects it. For the 3- to 6-year horizons, the two return shocks generally exert a negative, but small, effect on consumption growth. These opposite responses to changes in housing and stock returns suggest different mechanisms through which wealth affects consumption. Further, the housing return effect generally increases after 1980. The sub-period from 1980 to 2012 includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. These findings suggest that the magnitude of the relative return effects differs with both time and horizons and also depends on whether prices increase or decrease. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Beatrice Simo-Kengne & Stephen Miller & Rangan Gupta & Goodness Aye, 2015. "Time-Varying Effects of Housing and Stock Returns on U.S. Consumption," The Journal of Real Estate Finance and Economics, Springer, vol. 50(3), pages 339-354, April.
  • Handle: RePEc:kap:jrefec:v:50:y:2015:i:3:p:339-354
    DOI: 10.1007/s11146-014-9470-3
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    References listed on IDEAS

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    1. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
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    5. Goodness C. Aye & Rangan Gupta & Alain Kaninda & Wendy Nyakabawo & Aarifah Razak, 2013. "House Price, Stock Price and Consumption in South Africa: A Structural VAR Approach," Working Papers 201309, University of Pretoria, Department of Economics.
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    Citations

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    Cited by:

    1. Punzi, Maria Teresa, 2016. "Financial cycles and co-movements between the real economy, finance and asset price dynamics in large-scale crises," FinMaP-Working Papers 61, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    2. Rangan Gupta & Chi Keung Marco Lau & Stephen M. Miller & Mark E. Wohar, 2017. "U.S. Fiscal Policy and Asset Prices: The Role of Partisan Conflict," Working papers 2017-10, University of Connecticut, Department of Economics.
    3. Nikolaos Antonakakis & Rangan Gupta & Aviral K. Tiwari, 2016. "Time-Varying Correlations between Inflation and Stock Prices in the United States over the Last Two Centuries," Working Papers 201605, University of Pretoria, Department of Economics.
    4. Gupta, Rangan & Wohar, Mark, 2017. "Forecasting oil and stock returns with a Qual VAR using over 150years off data," Energy Economics, Elsevier, vol. 62(C), pages 181-186.
    5. Tsangyao Chang & Rangan Gupta & Anandamayee Majumdar & Christian Pierdzioch, 2017. "Predicting Stock Market Movements with a Time-Varying Consumption-Aggregate Wealth Ratio," Working Papers 201756, University of Pretoria, Department of Economics.
    6. N. Kundan Kishor & Hardik A. Marfatia, 2017. "The Dynamic Relationship Between Housing Prices and the Macroeconomy: Evidence from OECD Countries," The Journal of Real Estate Finance and Economics, Springer, vol. 54(2), pages 237-268, February.
    7. repec:eee:riibaf:v:42:y:2017:i:c:p:1-8 is not listed on IDEAS
    8. repec:taf:rjapxx:v:21:y:2016:i:2:p:196-216 is not listed on IDEAS
    9. Aviral Kumar Tiwari & Juncal Cunado & Rangan Gupta & Mark E. Wohar, 2017. "Are Stock Returns an Inflation Hedge for the UK? Evidence from a Wavelet Analysis Using Over Three Centuries of Data," Working Papers 201735, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Asset Returns; Consumption; Time-Varying Parameter Vector Autoregressive; C32; E21; G10;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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