Consumer Confidence or the Business Cycle

What Matters More for European Expected Returns?

Stig V. Møller, Henrik Nørholm, Jesper Rangvid

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Resumé

Answer: The business cycle.
We show that consumer confidence and the output gap both affect excess returns on stocks in many European countries: When the output gap is positive (the economy is doing well), expected returns are low, and when consumer confidence is high, expected returns are also low. Consumer confidence and the output gap are also highly positively correlated. In fact, we find that consumer confidence does not contain independent information (i.e. information over and above that contained by the output gap) about expected returns. Our use of European data allows us to examine both aggregate European and local-country data on consumer confidence and output gaps. We find that even local-country consumer confidence does not contain independent information about expected returns. Our findings have asset pricing implications: We show that the cross-country distribution of expected returns is better captured when using the European output gap as a risk factor.
OriginalsprogEngelsk
TidsskriftJournal of Empirical Finance
Vol/bind28
Sider (fra-til)230-248
ISSN0927-5398
DOI
StatusUdgivet - sep. 2014

Emneord

  • Time-varying expected returns
  • Business cycle risk
  • Output gap
  • Consumer confidence
  • Bootstrap
  • GMM

Citer dette

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Consumer Confidence or the Business Cycle : What Matters More for European Expected Returns? / Møller, Stig V.; Nørholm, Henrik; Rangvid, Jesper.

I: Journal of Empirical Finance, Bind 28, 09.2014, s. 230-248.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

TY - JOUR

T1 - Consumer Confidence or the Business Cycle

T2 - What Matters More for European Expected Returns?

AU - Møller, Stig V.

AU - Nørholm, Henrik

AU - Rangvid, Jesper

PY - 2014/9

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N2 - Answer: The business cycle.We show that consumer confidence and the output gap both affect excess returns on stocks in many European countries: When the output gap is positive (the economy is doing well), expected returns are low, and when consumer confidence is high, expected returns are also low. Consumer confidence and the output gap are also highly positively correlated. In fact, we find that consumer confidence does not contain independent information (i.e. information over and above that contained by the output gap) about expected returns. Our use of European data allows us to examine both aggregate European and local-country data on consumer confidence and output gaps. We find that even local-country consumer confidence does not contain independent information about expected returns. Our findings have asset pricing implications: We show that the cross-country distribution of expected returns is better captured when using the European output gap as a risk factor.

AB - Answer: The business cycle.We show that consumer confidence and the output gap both affect excess returns on stocks in many European countries: When the output gap is positive (the economy is doing well), expected returns are low, and when consumer confidence is high, expected returns are also low. Consumer confidence and the output gap are also highly positively correlated. In fact, we find that consumer confidence does not contain independent information (i.e. information over and above that contained by the output gap) about expected returns. Our use of European data allows us to examine both aggregate European and local-country data on consumer confidence and output gaps. We find that even local-country consumer confidence does not contain independent information about expected returns. Our findings have asset pricing implications: We show that the cross-country distribution of expected returns is better captured when using the European output gap as a risk factor.

KW - Time-varying expected returns

KW - Business cycle risk

KW - Output gap

KW - Consumer confidence

KW - Bootstrap

KW - GMM

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