Double Jeopardy: Households’ consumption responses to shocks in stock and mortgage markets

Abstract

Households reduce consumption following negative shocks to their stock holdings. Households also lower consumption following exogenous increases in mortgage debt payments. But what is the impact of simultaneous adverse shocks in both markets, such as in the 2008 financial crisis? Using detailed Danish household data we find that the reduction in consumption doubles if households are highly exposed to both the stock and the mortgage market. We also find that the negative effects persist over time. It has a severe effect on consumption as households with a high-risk profile in the asset market also tend to have high exposure in the debt market. We discuss underlying reasons behind our results and their implications for macroprudential policies.

Keywords: Mortgage choice; micro data; risk attitudes; stock market participation; consumption effects; financial crisis.

JEL Classification: G11, G50