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Investor sentiment and global economic conditions

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  • Herculano, Miguel C.
  • Lütkebohmert, Eva

Abstract

The paper examines the macroeconomic relevance of the common component of discount rate news in firm-level stock returns for G7 countries (except for Italy, focusing on each country’s index constituents) by applying a hierarchical dynamic factor model to the Campbell and Ammer (1993) return decomposition. This approach offers advantages over alternative investor sentiment indicators and is easily extended to a larger cross-section of countries. Evidence suggests global investor sentiment leads, rather than lags, domestic sentiment and global economic conditions. Investor sentiment predicts economic conditions in-sample and out-of-sample.

Suggested Citation

  • Herculano, Miguel C. & Lütkebohmert, Eva, 2023. "Investor sentiment and global economic conditions," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 134-152.
    • Handle: RePEc:eee:empfin:v:73:y:2023:i:c:p:134-152
    DOI: 10.1016/j.jempfin.2023.06.001
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    More about this item

    Keywords

    Business cycles; Hierarchical dynamic factor model; Stock market sentiment;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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