Do Personal Consumption Expenditures Reflect Investor Stock Sentiment?
Major Coleman IV
Syracuse University - Whitman School of Management
September 9, 2013
If investors choose consumption and investment jointly to maximize expected utility, then any investor sentiment about stock returns should be reflected in consumption choices. I find that non-durable consumption moves in the same direction as investor sentiment contemporaneously. But 2-4 years later, as sentiment corrects, consumption moves opposite to prior sentiment. The results are consistent with sentiment representing a false perception of a change in permanent future stock wealth, which leads to counterproductive attempts at consumption smoothing in aggregate. Sentiment-influenced consumption choices increase consumption's volatility and co-variance with the stock market, while lowering mean consumption and wealth.
Number of Pages in PDF File: 50
Keywords: investor sentiment, consumption, wealth effectworking papers series
Date posted: September 3, 2013 ; Last revised: January 27, 2014
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