The Inelastic Market: Heterogeneous Wealth Dynamics, Consumption Shares and Beliefs

Abstract

Investigating stockholder consumption growth is critical in asset pricing studies, as preference of stockholders differs from that of average households. The disagreement among households about the macroeconomic uncertainty leads to their heterogeneous stock market participation decisions, and allows both stockholders and non-stockholders to be fully irrational. This paper provides a new link between stockholder consumption and market returns when stock market is inelastic, and derives stockholder consumption growth dynamics. Exposure to stockholder consumption risks explains over a half cross-sectional equity return variations.