Rising household consumer debt: Good or bad? Empirical research on U.S. stock market volatility using normal mixture GARCH-MIDAS model

Sammanfattning: Household debt has been on the continuous rise to raise concern for its sustainability and its consequences to the financial system and the macro-economy as a whole. In this paper, I review empirical work on the growth of total household consumer debt ratio on long-term component of stock market volatility. The paper applies GARCH-MIDAS model with a mean-reverting unit weekly GARCH process, and a MIDAS (Mixed Data Sampling) applying to monthly household consumer debt ratio and errors following normal distribution, student-t distribution and two-component normal mixture distribution. The results show that household consumer debt ratio explains more than 12% of total stock volatility for the full sample from 01-01-1964 to 01-01-2015. In addition, household consumer debt ratio has mixed effect on stock market volatility. Income inequality seems to be plausible to explain the mixed effect. In low income inequality period, household consumer debt decreases stock market volatility. In high income inequality period, household consumer debt increases stock market volatility. It shapes part of a renewed interest in whether or not rising income inequality is the source of financial instability.