Consumer Confidence and Asset Prices: Some Empirical Evidence
42 Pages Posted: 29 Oct 2002
Date Written: September 30, 2002
We explore the conditional version of the CAPM and the CCAPM using the methodology of Lettau and Ludvigson (2001). As a conditioning variable, we use the Index of Consumer Sentiment from the University of Michigan. The ability of the confidence index to explain the cross-section of the 25 Fama-French portfolios is comparable to that of the consumption-to-wealth ratio advocated by Lettau and Ludvigson, or the default spread employed by Jagannathan and Wang (1996). As suggested by further analysis, the improved cross-sectional performance is related to the fact that the conditional market betas of small stocks are significantly more sensitive to the business cycle than those of large stocks.
Keywords: consumer confidence, conditional asset pricing, business cycle, time-varying risk premium
JEL Classification: G12, E32, E44
Suggested Citation: Suggested Citation