Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2018:1: Stock Market Returns and Consumption

Marco Di Maggio (), Amir Kermani () and Kaveh Majlesi ()
Additional contact information
Marco Di Maggio: Harvard Business School
Amir Kermani: UC Berkeley
Kaveh Majlesi: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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.

Keywords: Capital gain; Dividend income; Consumption; Near-rational behavior

JEL-codes: D15; E21; G12

57 pages, February 15, 2018

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