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Stock Market Returns and Consumption

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  • Di Maggio, Marco

    (Harvard Business School)

  • Kermani, Amir

    () (University of California, Berkeley)

  • Majlesi, Kaveh

    () (Lund University)

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 (MPC) of 13 percent for the bottom 50% of the wealth distribution, but a flat 5 percent for the rest of the distribution. Households' 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

  • Di Maggio, Marco & Kermani, Amir & Majlesi, Kaveh, 2018. "Stock Market Returns and Consumption," IZA Discussion Papers 11357, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp11357
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    Cited by:

    1. Cui, Wei & Sterk, Vincent, 2018. "Quantitative easing," LSE Research Online Documents on Economics 90874, London School of Economics and Political Science, LSE Library.
    2. Cui, Wei & Sterk, Vincent, 2018. "Quantitative Easing," CEPR Discussion Papers 13322, C.E.P.R. Discussion Papers.
    3. 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).
    4. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).
    5. Bertrand Garbinti & Pierre Lamarche & Charlélie Lecanu & Frédérique Savignac, 2020. "Wealth effect on consumption during the sovereign debt crisis: Households heterogeneity in the Euro area," Working papers 751, Banque de France.
    6. Asger Lau Andersen & Niels Johannesen & Mia Jørgensen & José-Luis Peydró, 2020. "Monetary policy and inequality," Economics Working Papers 1761, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2021.
    7. 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).
    8. 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.
    9. Fergus Cumming, 2019. "Mortgage Cash-flows and Employment," Discussion Papers 1922, Centre for Macroeconomics (CFM).
    10. Vincent Sterk & Wei Cui, 2019. "Quantitative Easing," 2019 Meeting Papers 29, Society for Economic Dynamics.
    11. Samuel M. Hartzmark & David H. Solomon, 2020. "Reconsidering Returns," NBER Working Papers 27380, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    capital gain; dividend income; consumption; near-rational behavior;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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