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Aggregate Consumption and the Stock Market: Should We Worry about Non-linear Wealth Effects?

  • Piergiorgio Alessandri

    ()

    (Department of Economics, Mathematics & Statistics, Birkbeck)

The linkage between stock market and aggregate consumption has been extensively studied in the context of linear econometric models. This paper proposes a less restrictive approach: short-run dynamics in US consumption are analysed applying semi-parametric techniques to a large sample of monthly data (1967-2002). This allows a rigorous assessment of the claim that consumers react differently to negative and positive changes in the value of their portfolios, or that they are only sensitive to 'large' equity price corrections. The data display indeed non-linearities of this type, but their significance is modest; the results corroborate the traditional view that, overall, Wall Street is not a major concern for American households.

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File URL: http://www.bbk.ac.uk/ems/research/wp/PDF/BWPEF0410.pdf
File Function: First version, 2004
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Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0410.

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Length: 43 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:bbk:bbkefp:0410
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  1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  2. Gonzalo, J. & Ng, S., 1996. "A Systematic Framework for Analyzing the Dynamic Effects of Permanent and Transitory Shocks," Cahiers de recherche 9603, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  3. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  4. Shlomo Benartzi & Richard H. Thaler, 1993. "Myopic Loss Aversion and the Equity Premium Puzzle," NBER Working Papers 4369, National Bureau of Economic Research, Inc.
  5. Athreya, Krishna B. & Pantula, Sastry G., 1986. "A note on strong mixing of ARMA processes," Statistics & Probability Letters, Elsevier, vol. 4(4), pages 187-190, June.
  6. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  7. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  8. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  9. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  12. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  13. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
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