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


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.
Original languageEnglish
JournalJournal of Empirical Finance
Pages (from-to)230-248
Publication statusPublished - Sept 2014

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