Consumer Confidence or the Business Cycle: What Matters More for European Expected Returns?

Stig V. Møller, Henrik Nørholm, Jesper Rangvid

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
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.
LanguageEnglish
JournalJournal of Empirical Finance
Volume28
Pages230-248
ISSN0927-5398
DOIs
StatePublished - Sep 2014

Keywords

    Cite this

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    title = "Consumer Confidence or the Business Cycle: What Matters More for European Expected Returns?",
    abstract = "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.",
    keywords = "Time-varying expected returns, Business cycle risk, Output gap, Consumer confidence, Bootstrap, GMM",
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    Consumer Confidence or the Business Cycle : What Matters More for European Expected Returns? / Møller, Stig V.; Nørholm, Henrik; Rangvid, Jesper.

    In: Journal of Empirical Finance, Vol. 28, 09.2014, p. 230-248.

    Research output: Contribution to journalJournal articleResearchpeer-review

    TY - JOUR

    T1 - Consumer Confidence or the Business Cycle

    T2 - Journal of Empirical Finance

    AU - Møller,Stig V.

    AU - Nørholm,Henrik

    AU - Rangvid,Jesper

    PY - 2014/9

    Y1 - 2014/9

    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

    U2 - 10.1016/j.jempfin.2014.07.004

    DO - 10.1016/j.jempfin.2014.07.004

    M3 - Journal article

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    EP - 248

    JO - Journal of Empirical Finance

    JF - Journal of Empirical Finance

    SN - 0927-5398

    ER -