Consumption Asymmetry and the Stock Market: Further Evidence (original) (raw)
Consumption asymmetry and the stock market: Empirical evidence
2006
This paper examines whether US stock-market value affects consumption asymmetrically. Using cointegration and error-correction methodology, the results confirm that stock-market value asymmetrically affects real per capita consumption. Negative “news” affects consumption more than positive “news.”
Consumption asymmetry and the stock market: new evidence through a threshold adjustment model
2005
Abstract This paper investigates whether stock market wealth affects real consumption asymmetrically through a threshold adjustment model. The empirical findings for the US show that wealth produces an asymmetric effect on real consumption, with negative'news' affecting consumption less than positive'news.'Thus, policy makers may want to focus more attention on preventing asset'bubbles' than on responding to negative asset shocks.
How important is the stock market effect on consumption?
Economic Policy Review, 1999
Many argue that the astonishing growth in Americans' stock portfolios in the 1990s has been a major force behind the growth of consumer spending. This article reviews the relationship between stock market movements and consumption. Using various econometric techniques and ...
1998
he second half of the 1990s has seen substantial changes in the wealth of American households, primarily owing to movements in the stock market. From mid-1994 to mid-1997, the aggregate value of household sector equity holdings (including those owned by nonprofits, mutual funds, and pensions and other fiduciaries) roughly doubled, for a dollar gain of about 5.2trillion.1Sincethen,stockmarketvaluesonbalancehavecontinuedtorise,buttherehavebeenmassivefluctuationswithinawideband;thedollarvalueofmovementswithintheband—fromthelowinOctober1997totherecenthighs—hasbeengreaterthan5.2 trillion. 1 Since then, stock market values on balance have continued to rise, but there have been massive fluctuations within a wide band; the dollar value of movements within the band—from the low in October 1997 to the recent highs—has been greater than 5.2trillion.1Sincethen,stockmarketvaluesonbalancehavecontinuedtorise,buttherehavebeenmassivefluctuationswithinawideband;thedollarvalueofmovementswithintheband—fromthelowinOctober1997totherecenthighs—hasbeengreaterthan3.0 trillion. 2 T These enormous swings in wealth no doubt have
Stock Market Fluctuations and Consumption Behaviour: some sectoral estimates
1998
72560 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original formatECO/WKP(98)21 ABSTRACT/RÉSUMÉ This paper examines the likely influence of recent stock market fluctuations on major OECD economies, focusing on wealth effects and consumption. After reviewing the relevant theoretical framework and available empirical evidence, consumption functions are estimated for the US including the influence of financial wealth. The resulting estimates of the marginal propensity to consume out of financial wealth are extrapolated to other G7 countries, allowing for differences in stock market capitalisation, and compared with ones obtained more directly from consumption functions that include stock market prices as an explanatory variable. Simulations are then carried out to assess the potential world impact of a major fall in stock market prices in the G7 countries using a version of the OECD INTERLINK model which embodies the lat...
Aggregate consumption spending, the stock market and asymmetric error correction
Quantitative Finance, 2004
In this study, we show how changes in wealth resulting from unanticipated changes in the value of equity holdings begin a process whereby households alter consumption growth in order to close the gap between actual and target spending. Because of changing uncertainty or equity price volatility over the stock market cycle, we found the time path of this adjustment to exhibit near-random walk behaviour during stock market downturns. Conversely, during 'boom' periods, e.g. when the value of equities held by households was greater than the threshold, the growth in consumer spending was quick to eliminate the disparity between actual and target spending.
The Financial Markets and Wealth Effects on Consumption: an Experimental Analysis
2003
The paper investigates the effects exerted by the ownership of quoted equities on intertemporal wealth allocation. To this end, it reports an experiment conducted with human subjects. The fact that an increasing share of household balances is allocated to equities raises numerous questions on the nature and magnitude of so-called 'wealth effects'. The traditional theories are based on the assumption of perfect rational agents and do not consider wealth effects in detail.
Mutual funds and the evolving long-run effects of stock wealth on U.S. consumption
Journal of Economics and Business, 2006
Lower mutual fund loads have plausibly boosted the stock wealth elasticity of U.S. consumption by enhancing stock liquidity and arguably by inducing stock ownership among middle-income families, consistent with theory and cross-section data (Guiso, Haliassios, and Jappelli (2003), Haliassios (2002), Heaton and Lucas (1996, 2000), and Vissing-Jorgensen (2002)). In load-modified models, the stock wealth elasticity is declining in loads and more stable long-run wealth and income coefficients arise, especially controlling for mortgage refinancing and equity withdrawal activity. Modified models imply that the stock wealth elasticity has risen, while conventional models overestimate the wealth and underestimate the income elasticities of consumption.
The Consumption-Wealth Ratio Under Asymmetric Adjustment
2007
This paper argues that nonlinear adjustment may provide a better explanation of fluctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to differ across regimes. Estimation of the system suggests that these states are related to the behaviour of financial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the first when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of standard models of consumption under uncertainty.
Consumption Volatility and the Cross-Section of Stock Returns*
Review of Finance, 2014
I derive and test multi-horizon implications of a consumption-based equilibrium model featuring fluctuating expected growth and volatility. My setup allows consumption dynamics to be estimated jointly with covariance risk prices in a single-stage generalized method of moment, and then inferences from asset pricing tests reflect uncertainty coming from factor estimation. I show that changes in consumption volatility are the key driver for explaining major asset pricing anomalies across risk horizons, while other factors play no or a secondary role. Value stocks and past long-term losers pay higher average returns mainly because they covary more negatively with these changes than what other stocks do.
Stock Market Fluctuations and Consumption Behaviour
OECD Economics Department Working Papers, 1998
72560 Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format Unclassified ECO/WKP(98)21 ECO/WKP 3. Such factors include the cost of capital, the level of debt of the corporate sector, the availability of internal finance, the uncertainty on demand and capacity utilisation. The quantification of such effects is discussed by Meredith (1997).
Consumption, Wealth, Stock and Government Bond Returns: International Evidence*
The Manchester School, 2011
In this paper, we show, from the consumer's budget constraint, that the residuals of the trend relationship among consumption, aggregate wealth, and labour income should predict both stock returns and government bond yields. We use data for several OECD countries and find that when agents expect future stock returns to be higher, they will temporarily allow consumption to rise. Regarding government bond yields, when bonds are seen as a component of asset wealth, then investors react in the same way. If, however, the increase in the yields is perceived as signalling a future rise in taxes, then they will temporarily reduce their consumption.
Resurrecting the wealth effect on consumption: further analysis and extension
2006
Abstract: This paper investigates whether various components of wealth affects real consumption asymmetrically through a threshold adjustment model. The empirical findings for the US show that stock market assets, financial assets (with stock market included), and household net assets exert a practical wealth effect on consumption expenditure.
The finacial markets and wealth effects on consumption
2003
ABSTRACT The paper investigates the effects exerted by the ownership of quoted equities on intertemporal wealth allocation. To this end, it reports an experiment conducted with human subjects. The fact that an increasing share of household balances is allocated to equities raises numerous questions on the nature and magnitude of so-called 'wealth effects'. The traditional theories are based on the assumption of perfect rational agents and do not consider wealth effects in detail.
Stockholding and stock market beliefs of American households over the business cycle
2011
Abstract We use household panel data from the Health and Retirement Study to estimate the effect of changes to stock market prices on householdsjportfolio composition, and the role of changes in beliefs in such effects. Our estimates imply that many households react to changes in stock prices in the previous two years by actively adjusting the share of stock% market based assets in their portfolios. On average, the effect exceeds the passive adjustment that changes in stock prices would imply.
Consumption-Wealth Comovement of the Wrong Sign
2004
Economic theory predicts that an unexpected wealth windfall should increase consumption shortly after the windfall is received. We test this prediction using administrative records on over 40,000 401(k) accounts. Contrary to theory, we estimate a negative short-run marginal propensity to consume out of idiosyncratic 401(k) capital gains shocks. These results cannot be interpreted as standard intertemporal substitution, since the idiosyncratic returns that we study do not predict future returns. Instead, our findings imply that many investors are influenced by a positive feedback effect, through which higher recent returns encourage higher short-run saving. Like any other animal, 401(k) participants appear to increase behaviors that have been associated with high rewards in the past.
The Asymmetric Responses of Stock Markets
Research Papers in Economics, 2018
This paper investigates how oil price shocks interact with oil-importing and oil-exporting stock markets within a nonlinear autoregressive distributed lag framework. By defining oil prices as endogenous variables, this model allows us to gage the shock transmission among the system variables and consider the asymmetric long-and short-run effects. Our empirical findings show an asymmetric long-run relation between stock market prices and macroeconomic fundamentals. These results suggest that investors should adjust their investment strategies to changes in oil prices and consider the asymmetry when forecasting and managing the negative impacts of unexpected events.
Time-Varying Effects of Housing and Stock Prices on U.S. Consumption
SSRN Electronic Journal, 2013
This paper applies a time-varying parameter vector autoregressive (TVP-VAR) approach to estimate the relative effects of housing and stock prices on US consumption over time. We use annual data from 1890 to 2012 and find that over different horizons and over time, generally the housing price positively affects consumption while the stock price negatively affects consumption. These opposite responses to changes in housing and stock prices suggest different mechanisms through which wealth affects consumption. Further, the housing price effect proves larger in absolute value than the stock price effect after 1980. Between 1980 and 2007, housing wealth generally exerted a larger effect on consumption. This sub-period includes the 1997/2002 asset price boom/bust where house prices continued to rise moderately as stock prices fell. Finally, the co-occurrence of the decline in both housing and stock prices during the 2007-2009 episode produced bigger effects of the housing price for the first five years of the impulse responses while the higher magnitude of the stock price effect appears in the 6-year horizon. These findings suggest that the magnitude of the relative price effects differs with both time and horizons and also depends on whether prices increase or decrease.
Expected stock returns, real business activity and consumption smoothing
International Review of Financial Analysis, 1995
This paper develops a general equilibrium asset-pricing model that incorporates both production technology and consumption-smoothing behavior. It shows that technology and productivity shocks, labor input and capital stock are important factors in explaining the behavior of expected asset returns. Empirical tests indicate that, while technology shocks and growth in capital stock are significant factors in explaining asset returns, it is the labor growth variable that appears to provide most of the explanatory power. Furthermore, our results indicate that investors are likely to have high levels of relative risk aversion as well as consumption-smoothing behavior.