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We estimate the effect of stock market fluctuations on subjective well-being and mental health using Australian survey data over the period 2001–12, which includes the global financial crisis. A particular innovation of the paper is the use of three satisfaction measures – overall, financial, employment – and the use of a stylised lifecycle investment model. These features, coupled with a robust identification strategy based on comparing survey respondents interviewed in the same quarter and location, allow us to better understand individual reactions to stock market changes. We find that stock market increases lead to significant but modest improvements in life satisfaction and mental health. This effect is driven by young and middle-aged males, and is stronger for those with direct exposure to the stock market. For young cohorts, the stock market index acts as a leading indicator of employment prospects, while for older cohorts it acts directly on financial satisfaction.*

A central task of applied economists is to understand how individuals react to income and wealth changes caused by government policies, shocks to individual or family circumstances, and to movements in the macroeconomic environment. The question of whether money buys happiness remains contentious despite decades of research on the topic.

Unresolved issues include whether anticipated future income streams matter, and whether there are groups for whom income and anticipated income matter less, issues that are particularly salient in the early stages of recessions when expectations are in flux. However, the unexpected turbulence of the recent global financial crisis (GFC) has provided social scientists with a real-world experimental setting to study the effect of financial shocks on health and subjective well-being.

This paper investigates the extent to which subjective well-being and measures of health react to changes in a leading stock market index using Australian survey data over the period 2001 to 2012. We match stock market changes observed in this period to individual level data from the Household, Income and Labour Dynamics in Australian Survey (HILDA) to study how this form of exogenous variation impacts on subjective well-being and health.

We examine several aspects of this relationship. First, we investigate whether younger or older people are more affected, anticipating that younger individuals are more likely to worry about their jobs and older people relatively more about their assets. Second, we test whether individuals who are directly exposed to the stock market are most affected by the stock market. Third, we investigate if health is affected by stock market changes using reports on satisfaction with health, the mental health component of the commonly used SF-36 scale, and an indicator of having a chronic health condition. Finally, we determine the extent to which Australians’ well-being is affected by Australian or US stock markets.

Following the US literature that shows well-being reacts quickly to stock market changes, and that individuals adapt quickly to financial shocks, we focus exclusively on the short-term impacts, and do not consider longer-term changes to investments, consumption or savings.

Conclusion

Our main findings are that stock market increases are positively and significantly related to life satisfaction, though the size of the effect is modest. As expected, we find that this relationship is larger for those who have greater exposure to financial markets. Importantly, this effect is only found for males.

Over our sample period we observe a number of quarterly movements in the monthly averaged stock market index of 200−300 index points, and a fall in the index of around 1,100 points observed around October 2008. The effect of such a large fall in male life satisfaction is predicted by our model to be around one-quarter greater in magnitude than the estimated gender gap in life satisfaction (-0.141 for males) or about one-third of the married/cohabiting premium (+0.562). In line with a simple lifecycle model of asset accumulation, the results suggest that for young men the stock market index acts as a signal for employment prospects, whereas for middle-aged (pre-retirement) men the market affects financial satisfaction. We find no evidence that stock market affects female subjective well-being or health.

Overall, this paper contributes to the existing international literature by providing additional evidence using Australian data that individuals’ assessments of their own health and well-being are significantly affected by plausibly exogenous economic-related shocks.

* This paper uses unit record data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. The HILDA Project was initiated and is funded by the Australian Government Department of Social Services (DSS) and is managed by the Melbourne Institute of Applied Economic and Social Research (Melbourne Institute).The findings and views reported in this paper, however, are those of the authors and should not be attributed to either DSS or the Melbourne Institute.


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This Working Paper was produced by the CSIRO-Monash Superannuation Research Cluster a collaboration between the CSIRO and Monash University, the University of Western Australia, Griffith University and the University of Warwick in the United Kingdom. In addition, the Cluster engages on an ongoing basis with a range of industry supporters, government agencies and industry peak bodies who assist in providing guidance and feedback to researchers, providing data, and in disseminating outcomes. The purpose of the Super Research Cluster is to examine issues pertaining to the future of Australia’s superannuation and retirement systems.