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Stock Market Returns and Consumption

Author

Listed:
  • 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. Vincent Sterk & Wei Cui, 2019. "Quantitative Easing," 2019 Meeting Papers 29, Society for Economic Dynamics.
    4. Wei Cui & Vincent Sterk, 2018. "Quantitative Easing," Discussion Papers 1830, Centre for Macroeconomics (CFM).

    More about this item

    Keywords

    capital gain; dividend income; consumption; near-rational behavior;

    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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