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The Effect of The Stock Market Collapse during The 2007-2008 Financial Crisis on Households’ Consumption Decision Enkhbaatar Tsenguun
| Content Provider | Semantic Scholar |
|---|---|
| Author | Tsenguun, Enkhbaatar |
| Copyright Year | 2019 |
| Abstract | During the 2007-2008 financial crisis, the stock market return dropped significantly. Furthermore, there is a possibility that households’ expectation of the future volatility of stock market return also increased as a response to this event. Since these two events happened at the same time, evaluating the effects of the increase in households’ expected volatility of the stock market return and the drop in the stock market return on households’ consumption decision separately is particularly hard. In this paper, I construct and estimate the households’ dynamic model to capture the effect of the stock market collapse during the 2007-2008 financial crisis on households’ consumption and stock market participation decision. I find that the drop in the stock market return and the increase in the expected future volatility of the stock market return between 2006 and 2008 decreased the consumption of stock holding households by 9.3% in average. Furthermore, I find that the consumption decision of wealthy households was almost not affected by the increase in households’ expected volatility of the stock market return for the next period between 2006 and 2008, in contrast to households at the bottom of the wealth distribution who were affected significantly. . Moreover, I show that the drop in the risk-free rate, due to the change in the monetary policy regime during the 2007-2008 financial crisis, triggered larger effect on households’ consumption decision in comparison to the stock market collapse and substantially decreased the consumption inequality among households. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://econ2017.sites.olt.ubc.ca/files/2019/10/JMP_Tsenguun_Enkhbaatar.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
