Asset holding and consumption volatility

Abstract

We investigate the possibility that limited participation in asset markets, and the stock market in particular, might explain the lack of correspondence between the sample moments of the intertemporal marginal rate of substitution and asset returns in U.K. data. We estimate ownership probabilities to separate "likely" shareholders from nonshareholders, enabling us to control for changing composition effects as well as selection into the group. We then construct estimates This study has been financed under the Economic and Social Research Council Centre for the Microeconomic Analysis of Fiscal Policy at the Institute for Fiscal Studies. We are also grateful for funding from the European Union under the Training and Mobility of Researchers scheme, contract ERBFMRXCT960016. Material from the Family Expenditure Survey made available by the Office for National Statistics through the Economic and Social Research Council data archive has been used by permission of the controller of Her Majesty's Stationery Office. Neither the ONS nor the ESRC data archive bears any responsibility for the analysis or interpretation of the data reported here. Thanks are due to Richard Blundell, Lucy Chennells, Lars Hansen, Costas Meghir, Annette VissingJørgensen, Guglielmo Weber, and Frank Windmeijer for useful comments and discussions. We also received useful feedback from the participants at the February 1997 TMR meeting on savings and pensions, the summer 1997 NBER workshop on consumption, and the 1997 Econometric Society European meetings and at seminars at Bristol University, Oxford University, the Inter American Development Bank, the International Monetary Fund, Institut National de las Statistique et de Etudes Economiques, the International Institute at the University of Stockholm, and the University of Warwick. The usual disclaimer applies. 772journal of political economy of the IMRS for each of these different groups and consider their time-series properties. We find that the consumption growth of shareholders is more volatile than that of nonshareholders and more highly correlated with excess returns to shares. In particular, one cannot reject the predictions of the consumption capital asset pricing model for the group of households predicted to own both assets. This is in contrast to the failure of the model when estimated on data for all households.