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Stock Market Returns and Consumption

Author

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  • Marco Di Maggio
  • Amir Kermani
  • Kaveh Majlesi

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 23% for the bottom 50% of the wealth distribution and about 3% for the top 30% of the wealth 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

  • Marco Di Maggio & Amir Kermani & Kaveh Majlesi, 2018. "Stock Market Returns and Consumption," NBER Working Papers 24262, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24262
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G1 - Financial Economics - - General Financial Markets

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