Aggregate Consumption Spending, the Stock Market, and Asymmetric Error Correction
Quantitative Finance, Vol. 4, pp. 191-198, 2004
Posted: 7 Mar 2006
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 behavior 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.
Keywords: asymmetric error correction, random walk, cointegration, aggregate consumption
JEL Classification: C15, C22, D12, E44
Suggested Citation: Suggested Citation