Myunghwan Andrew Lee

Stock price movements affect household consumption through changes in wealth. Yet they can also change expectations of future equity returns, altering incentives to save. This paper provides direct evidence on this belief channel. I combine a randomized information experiment among Korean households with survey expectations and transaction-based spending data. Information about past market returns shifts expectations without changing current portfolio values. Positive return corrections raise expected returns even at long horizons but reduce subsequent spending among stockholders, consistent with strong intertemporal substitution. To quantify this channel, I use the experimental responses to discipline a consumption-saving model with learning. The model implies that belief-induced saving offsets three-quarters of the consumption increase that would arise if return beliefs remained unchanged. Return beliefs can therefore substantially dampen the transmission of stock price movements to household consumption.