Publications
Publications
- December 2020
- Journal of Finance
Stock Market Returns and Consumption
By: Marco Di Maggio, Amir Kermani and Kaveh Majlesi
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% for the bottom 50% of the wealth distribution but a flat 5% 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; Investment Return; Household; Spending; Behavior
Citation
Di Maggio, Marco, Amir Kermani, and Kaveh Majlesi. "Stock Market Returns and Consumption." Journal of Finance 75, no. 6 (December 2020): 3175–3219. (DFA Distinguished Paper Prize.)