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Stock Market Returns and Consumption

Marco Di Maggio, Amir Kermani and Kaveh Majlesi
Additional contact information
Marco Di Maggio: Harvard Business School and NBER
Amir Kermani: UC Berkeley and NBER

No 1198, Working Paper Series from Research Institute of Industrial Economics

Abstract: This paper employs Swedish data containing security level information on households' stock holdings to investigate how consumption responds to changes in stock market returns. We exploit households’ portfolio weights in previous years as an instrument for actual capital gains and dividends payments. We find that 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. We also find that households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are broadly consistent with near-rational behavior in which households optimize their consumption with respect to capital gains and dividends income as if they were separate sources of income.

Keywords: Capital gain; Dividend income; Consumption; Near-rational behavior (search for similar items in EconPapers)
JEL-codes: D14 E21 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-upt
Date: 2018-02-02
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Working Paper: Stock Market Returns and Consumption (2018) Downloads
Working Paper: Stock Market Returns and Consumption (2018) Downloads
Working Paper: Stock Market Returns and Consumption (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:1198

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