Stock Market Returns and Consumption
MARCO DI MAGGIO
Search for more papers by this authorCorresponding Author
AMIR KERMANI
Correspondence: Amir Kermani, Haas School of Business, UC Berkeley 2220 Piedmont ave, Berkeley, CA 94720 510-664-4132; e-mail: kermani@berkeley.edu.
Search for more papers by this authorKAVEH MAJLESI
Marco Di Maggio is with Harvard Business School and NBER. Amir Kermani is with UC Berkeley and NBER. Kaveh Majlesi is with Lund University, Monash University, CEPR, IFN, and IZA. The data used in this paper come from the Swedish Interdisciplinary Panel (SIP) administered at the Centre for Economic Demography, Lund University, Sweden. We thank two anonymous referees, an Associate Editor, and the Editor, Stefan Nagel, for helpful comments that significantly improved the paper. We also thank Malcolm Baker; James Cloyne; Chris Carroll; Francesco D'Acunto; Samuel Hartzmark; Luigi Guiso; Matti Keloharju; Ralph Koijen; David Laibson; Geng Li; Jonathan Parker; Luigi Pistaferri; Larry Schmidt; Paolo Sodini; David Sraer; Stijn Van Nieuwerburgh; Gianluca Violante; Roine Vestman; Annette Vissing-Jørgensen; and seminar participants at the 2017 meeting of the Econometric Society, New York University Conference on Household Finance, CEPR Household Finance Workshop in Copenhagen, Helsinki Finance Summit, NBER SI Consumption Micro to Macro, MIT Sloan, UCSD, CREI and UPF, NY Fed, UC Berkeley, University of Zurich, SFS Cavalcade, the European Finance Association, and the Western Finance Association for helpful comments. We thank Terrance Odean for providing data from a large brokerage in the United States. Leonel Drukker and Erik Grenestam provided excellent research assistance. Kermani is grateful for research support from the Fisher center for Real Estate and Urban Economics and Majlesi acknowledges research support from Jan Wallanders and Tom Hedelius Foundation. Aside from these funding sources, all three authors have nothing to disclose with respect to The Journal of Finance disclosure policy.
Search for more papers by this authorMARCO DI MAGGIO
Search for more papers by this authorCorresponding Author
AMIR KERMANI
Correspondence: Amir Kermani, Haas School of Business, UC Berkeley 2220 Piedmont ave, Berkeley, CA 94720 510-664-4132; e-mail: kermani@berkeley.edu.
Search for more papers by this authorKAVEH MAJLESI
Marco Di Maggio is with Harvard Business School and NBER. Amir Kermani is with UC Berkeley and NBER. Kaveh Majlesi is with Lund University, Monash University, CEPR, IFN, and IZA. The data used in this paper come from the Swedish Interdisciplinary Panel (SIP) administered at the Centre for Economic Demography, Lund University, Sweden. We thank two anonymous referees, an Associate Editor, and the Editor, Stefan Nagel, for helpful comments that significantly improved the paper. We also thank Malcolm Baker; James Cloyne; Chris Carroll; Francesco D'Acunto; Samuel Hartzmark; Luigi Guiso; Matti Keloharju; Ralph Koijen; David Laibson; Geng Li; Jonathan Parker; Luigi Pistaferri; Larry Schmidt; Paolo Sodini; David Sraer; Stijn Van Nieuwerburgh; Gianluca Violante; Roine Vestman; Annette Vissing-Jørgensen; and seminar participants at the 2017 meeting of the Econometric Society, New York University Conference on Household Finance, CEPR Household Finance Workshop in Copenhagen, Helsinki Finance Summit, NBER SI Consumption Micro to Macro, MIT Sloan, UCSD, CREI and UPF, NY Fed, UC Berkeley, University of Zurich, SFS Cavalcade, the European Finance Association, and the Western Finance Association for helpful comments. We thank Terrance Odean for providing data from a large brokerage in the United States. Leonel Drukker and Erik Grenestam provided excellent research assistance. Kermani is grateful for research support from the Fisher center for Real Estate and Urban Economics and Majlesi acknowledges research support from Jan Wallanders and Tom Hedelius Foundation. Aside from these funding sources, all three authors have nothing to disclose with respect to The Journal of Finance disclosure policy.
Search for more papers by this authorABSTRACT
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.
Supporting Information
Filename | Description |
---|---|
jofi12968-sup-0001-OnlineAppendix.pdf545.2 KB | Appendix S1: Internet Appendix. |
jofi12968-sup-0002-ReplicationCode.zip30.2 KB | Replication code. |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Agarwal, Sumit, and Wenlan Qian, 2014, Consumption and debt response to unanticipated income shocks: Evidence from a natural experiment in Singapore, American Economic Review 104, 4205–4230.
- Agarwal, Sumit, and Wenlan Qian, 2017, Access to home equity and consumption: Evidence from a policy experiment, Review of Economics and Statistics 99, 40–52.
- Aladangady, Aditya, 2017, Housing wealth and consumption: Evidence from geographically-linked microdata, American Economic Review 107, 3415–3446.
- Baker, Malcolm, Stefan Nagel, and Jeffrey Wurgler, 2007, The effect of dividends on consumption, Brookings Papers on Economic Activity 38, 231–292.
10.1353/eca.2007.0010 Google Scholar
- Baker, Scott, 2018, Debt and the consumption response to household income shocks: Validation and application of linked financial account data, Journal of Political Economy 126, 1504–1557.
- Baker, Scott R., Lorenz Kueng, Steffen Meyer, and Michaela Pagel, 2018, Measurement error in imputed consumption, NBER Working Paper No. w25078.
- Barber, Brad M., and Terrance Odean, 2000, Trading is hazardous to your wealth: The common stock investment performance of individual investors, Journal of Finance 55, 773–806.
- Beaudry, Paul, and Franck Portier, 2006, News, stock prices and economic fluctuations, American Economic Review 96, 1293–1307.
- Benartzi, Shlomo, 2001, Excessive extrapolation and the allocation of 401(k) accounts to company stock, Journal of Finance 56, 1747–1764.
- Black, Sandra E., Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi, 2017, On the origins of risk-taking in financial markets, Journal of Finance, 72, 2229–2278.
- Bostic, Raphael, Stuart Gabriel, and Gary Painter, 2009, Housing wealth, financial wealth, and consumption: New evidence from micro data, Regional Science and Urban Economics 39, 79–89.
- Calvet, Laurent E., John Y. Campbell, and Paolo Sodini, 2007, Down or out: Assessing the welfare costs of household investment mistakes, Journal of Political Economy 115, 707–747.
- Calvet, Laurent E., John Y. Campbell, and Paolo Sodini, 2009, Fight or flight? Portfolio rebalancing by individual investors, Quarterly Journal of Economics 124, 301–348.
- Calvet, Laurent E., and Paolo Sodini, 2014, Twin picks: Disentangling the determinants of risk-taking in household portfolios, Journal of Finance 69, 867–906.
- Campbell, John Y., and João F. Cocco, 2007, How do house prices affect consumption? Evidence from micro data, Journal of Monetary Economics 54, 591–621.
- Carroll, Christopher D., 1997, Buffer-stock saving and the life cycle/permanent income hypothesis, Quarterly Journal of Economics 112, 1–55.
- Carroll, Christopher D., Misuzu Otsuka, and Jiri Slacalek, 2011, How large are housing and financial wealth effects? A new approach, Journal of Money, Credit, and Banking 43, 55–79.
- Carroll, Christopher D., and Xia Zhou, 2012, Dynamics of wealth and consumption: New and improved measures for U.S. states, B.E. Journal of Macroeconomics 12, 1–42.
- Case, Karl E., John M. Quigley, and Robert J. Shiller, 2005, Comparing wealth effects: The stock market versus the housing market, Advances in Macroeconomics 5, 1–34.
10.2202/1534-6013.1235 Google Scholar
- Case, Karl E., John M. Quigley, and Robert J. Shiller, 2013, Wealth effects revisited 1975-2012, Critical Finance Review 2, 101–128.
10.1561/104.00000009 Google Scholar
- Chodorow-Reich, Gabriel, Plamen T. Nenov, and Alp Simsek, 2020, Stock market wealth and the real economy: A local labor market approach, NBER Working Paper No. 25959.
- Cieslak, Anna, and Annette Vissing-Jørgensen, 2020, The economics of the Fed put, NBER Working Paper No. 26894.
- Cloyne, James, Kilian Huber, Ethan Ilzetzki, and Henrik Kleven, 2019, The effect of house prices on household borrowing: A new approach, American Economic Review 109, 2104–2136.
- Cocco, João F., Francisco J. Gomes, and Pascal J. Maenhout, 2005, Consumption and portfolio choice over the life cycle, Review of Financial Studies 18, 491–533.
- Coval, Joshua D., and Tobias J. Moskowitz, 2001, The geography of investment: Informed trading and asset prices, Journal of Political Economy 109, 811–841.
- Davis, Morris A., and Michael G. Palumbo, 2001, A primer on the economics and time series econometrics of wealth effects, Finance and Economics Discussion Series 2001–09, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board.
- Dynan, Karen. E., and Dean M. Maki, 2001, Does stock market wealth matter for consumption? Finance and Economics Discussion Series 2001–23, Board of Governors of the Federal Reserve System.
- Eika, Lasse, Magne Mogstad, Ola L. Vestad, 2020, What can we learn about household consumption from information on income and wealth, Journal of Public Economics (forthcoming).
- Gourinchas, Pierre-Oliver, and Jonathan A. Parker, 2002, Consumption over the life cycle, Econometrica 70, 47–89.
- Grant, Charles, and Tuomas A. Peltonen, 2008, Housing and equity wealth effects of Italian households, ECB Working Paper No. 857.
- Guiso, Luigi, Monica Paiella, and Ignazio Visco, 2006, Do capital gains affect consumption? Estimates of wealth effects from Italian households' behavior, in Lawrence Klein, ed.: Long Run Growth and Short Run Stabilization: Essays in Memory of Albert Ando (1929-2002) (Edward Elgar Publishing, Cheltenham).
10.4337/9781781950500.00008 Google Scholar
- Harris, Lawrence E., Samuel M. Hartzmark, and David H. Solomon, 2015, Juicing the dividend yield: Mutual funds and the demand for dividends, Journal of Financial Economics 116, 433–451.
- Hartzmark, Samuel M., and David H. Solomon, 2013, The dividend month premium, Journal of Financial Economics 109, 640–660.
- Hartzmark, Samuel M., and David H. Solomon, 2019, The dividend disconnect, Journal of Finance 74, 2153–2199.
- Jappelli, Tullio, and Luigi Pistaferri, 2014, Fiscal policy and MPC heterogeneity, American Economic Journal: Macroeconomics 6, 107–136.
- Johnson, David S., Robert McClelland, Jonathan A. Parker, and Nicholas S. Souleles, 2013, Consumer spending and the economic stimulus payments of 2008, American Economic Review 103, 2530–2553.
- Johnson, David S., Jonathan A. Parker, and Nicholas S. Souleles, 2006, Household expenditure and the income tax rebates of 2001, American Economic Review 96, 1589–1610.
- Kaplan, Greg, and Giovanni L. Violante, 2014, A model of the consumption response to fiscal stimulus payments, Econometrica 82, 1199–1239.
- Koijen, Ralph, Stijn Van Nieuwerburgh, and Roine Vestman, 2015, Judging the quality of survey data by comparison with “Truth” as measured by administrative records: Evidence from Sweden, in Christopher D. Carrol, Thomas F. Crossley, and John Sabelhaus, eds.: Improving the Measurement of Consumer Expenditures (University of Chicago Press, Chicago, IL).
10.7208/chicago/9780226194714.003.0012 Google Scholar
- Kolsrud, Jonas, Camille Landais, and Johannes Spinnewijn, 2019, The value of registry data for consumption analysis: An application to health shocks, Journal of Public Economics (forthcoming).
- Kueng, Lorenz, 2018, Excess sensitivity of high-income consumers, Quarterly Journal of Economics 133, 1693–1751.
- Meulbroek, Lisa, 2005, Company stock in pension plans: How costly is it? Journal of Law and Economics 48, 443–474.
- Meyer, Steffen, and Michaela Pagel, 2019, Fully closed: Individual responses to realized gains and losses, NBER Working Paper No. 25542.
- Mian, Atif, and Amir Sufi, 2011, House prices, home equity-based borrowing, and the U.S. household leverage crisis, American Economic Review 101, 2132–2156.
- Miller, Merton H., and Franco Modigliani, 1961, Dividend policy, growth, and the valuation of shares, Journal of Business 34, 411–433.
- Mitchell, Olivia S., and Stephen P. Utkus, 2003, The role of company stock in defined contribution plans, in Olivia S. Mitchell, and Kent Smetters, eds.: The Pension Challenge: Risk Transfers and Retirement Income Security (Oxford University Press, Oxford).
10.1093/0199266913.001.0001 Google Scholar
- Paiella, Monica, 2009, The stock market, housing and consumer spending: A survey of the evidence on wealth effects, Journal of Economic Surveys 23, 945–973.
- Paiella, Monica, and Luigi Pistaferri, 2017, Decomposing the wealth effect on consumption, Review of Economics and Statistics 99, 710–721.
- Pástor, Ľuboš, Robert F. Stambaugh, and Lucian A. Taylor, 2015, Scale and skill in active management, Journal of Financial Economics 116, 23–45.
- Poterba, James M., 2000, Stock market wealth and consumption, Journal of Economic Perspectives 14, 99–118.
- Shefrin, Hersh M., and Richard Thaler, 1988, The behavioral life-cycle hypothesis, Economic Inquiry 26, 609–643.
- Zeldes, Stephen P., 1989, Optimal consumption with stochastic income: Deviations from certainty equivalence, Quarterly Journal of Economics 104, 275–298.