Consumption response to stock prices shocks in South Africa: Does life cycle hypothesis hold?

This study examines whether current consumption responds to future income proxied by stock returns in South Africa using quarterly data over the period from 1986 Q1 to 2016Q1. To address different questions underscoring the predicted links between consumption spending and wealth fluctuations, the empirical set up distinguishes between positive and negative income shocks and pays specific attention to non-durable consumption goods (food consumption). Generalised impulse response functions from a trivariate VAR indicate that total households’ consumption responds immediately and persistently to an unexpected increase in the stock returns. In contrast, following an unexpected decrease in the stock returns, households’ total consumption reacts negatively with a lag (about 4 quarters after the shock) and last for only one quarter. More interestingly, food consumption appears to be unresponsive to neither a positive nor a negative shock in stock returns. Unlike durable good, these findings suggest an evidence of food consumption smoothing throughout household’s life cycle.