The Power of Bad: The Negativity Bias in Consumer Sentiment Announcements on Stock Returns
35 Pages Posted: 15 Jun 2010
Date Written: June 15, 2010
This paper examines the equity market reaction to consumer sentiment in the context of the sentiment index issued by the Melbourne Institute of Applied Economics and Social Research. Unlike the Michigan index in the US, which is announced in phases, this index is announced once per month, which makes the Australian counterpart particularly useful for analyzing the announcement effects of sentiment. Our results indicate that consumer sentiment has valuable information content. Further, a version of the “negativity effect” (from the psychology literature) is documented in which an asymmetric response is observed with regard to “good” versus “bad” sentiment news. Specifically, when a lower (higher) than previous month consumer sentiment index is announced, the equity market experiences a significant negative announcement day (no) effect. The stock market recovers from the “bad sentiment news” shock, post announcement. The results are robust to a range of additional tests.
Keywords: Investor Sentiment, Stock Market Returns, Market Efficiency
JEL Classification: G14
Suggested Citation: Suggested Citation