Consumer Confidence and Asset Prices: Some Empirical Evidence
43 Pages Posted: 22 Dec 2004
Date Written: October 13, 2004
We estimate fundamental and sentiment components of consumer confidence. In a time-series framework, we model the returns of equity portfolios sorted on various characteristics as a function of the market factor, allowing market beta to vary with the fundamental component of confidence. After controlling for the time variation of betas, we study the time variation of the pricing error with sentiment. Over the last 25 years (which represent relatively active household participation in the equity markets), consumer confidence forecasts returns in a manner consistent with the sentiment - based behavioral hypothesis.
Keywords: Consumer confidence, investor sentiment
JEL Classification: G12, G14
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