The Inelastic Market: Stockholder Wealth, Consumption Share and Belief

Investigating stockholder consumption growth is critical in asset pricing studies, as preference and risk averse of stockholders differ from that of average households. The disagreement among households about the macroeconomic uncertainty leads to their heterogeneous stock market participation decisions, and allows irrational stockholders and non-stockholders to survive in the long run. When stock market is inelastic, this paper uncovers a recursive relationship between stockholder consumption and market returns and shows theoretically that stockholder consumption growth is critical in asset pricing studies. Empirically, this paper demonstrates that the exposure to stockholder consumption risks explains over a half cross-sectional equity return variations.