Equities, liquidity and consumption: does the stock market matter?

Sohrab Abizadeh and Dennis Ng

Applied Financial Economics, 2009, vol. 19, issue 15, pages 1187-1196

Abstract: A relatively strong performance of the North American stock markets during the last two decades, notwithstanding the sharp decline experienced in the year 2000 and beyond, has set the stage for an empirical investigation of the possible effects that stock wealth, among other variables, can have on the consumption patterns of Canada and the United States. We employ quarterly data to test for the wealth effect hypothesis using the stock wealth variable. Our comprehensive theoretical model is based on the life cycle consumption function and includes both human and nonhuman wealth. Based on the dynamic Ordinary Least Squares (OLS) method employed, we confirm that part of the increase in aggregate consumption in our sample countries is explained by the stock wealth variable, thus providing further support to the wealth effect hypothesis.

Date: 2009

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