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Sentiment: The bridge between financial markets and macroeconomy

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  • Chen, Zhenxi
  • Lien, Donald
  • Lin, Yaheng

Abstract

This paper develops a parsimonious model by incorporating a boundedly rational agent-based model from the finance literature into the macroeconomic framework. An empirical investigation using US data shows that firm investment depends on sentiment and interest rate, while sentiment and short-term interest rate are influenced by the stock market. The stock market is subject to the influences of firm performance as well as the sentiment. It is found that sentiment serves as a bridge connecting the macroeconomy and the stock market. On the one hand, the macroeconomy influences the stock market through sentiment as sentiment affects the derived fundamental value of the stock market. On the other hand, the stock market has an indirect influence on the macroeconomy in terms of investment and capital stock through its impact on sentiment and interest rate.

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  • Chen, Zhenxi & Lien, Donald & Lin, Yaheng, 2021. "Sentiment: The bridge between financial markets and macroeconomy," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 1177-1190.
    • Handle: RePEc:eee:jeborg:v:188:y:2021:i:c:p:1177-1190
    DOI: 10.1016/j.jebo.2021.06.025
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    Cited by:

    1. Anastasiou, Dimitris & Kallandranis, Christos & Drakos, Konstantinos, 2022. "Borrower discouragement prevalence for Eurozone SMEs: Investigating the impact of economic sentiment," Journal of Economic Behavior & Organization, Elsevier, vol. 194(C), pages 161-171.
    2. Gaies, Brahim & Nakhli, Mohamed Sahbi & Ayadi, Rim & Sahut, Jean-Michel, 2022. "Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 290-303.
    3. Kanzari, Dalel & Nakhli, Mohamed Sahbi & Gaies, Brahim & Sahut, Jean-Michel, 2023. "Predicting macro-financial instability – How relevant is sentiment? Evidence from long short-term memory networks," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Agoraki, Maria-Eleni K. & Aslanidis, Nektarios & Kouretas, Georgios P., 2022. "U.S. banks’ lending, financial stability, and text-based sentiment analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 73-90.
    5. Qiao, Xingzhi & Zhu, Huiming & Zhang, Zhongqingyang & Mao, Weifang, 2022. "Time-frequency transmission mechanism of EPU, investor sentiment and financial assets: A multiscale TVP-VAR connectedness analysis," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Sentiment; Stock market; Real effect;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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