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The Stock Market and the Consumer Confidence Channel in Canada

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Abstract

This paper provides new evidence on the relations between the stock market and consumer behavior in Canada. It differentiates between two channels of stock price transmission: a direct wealth channel that operates through changes in wealth and an indirect consumer confidence channel that affects consumption through changes in consumer optimism. The two channels are evaluated by testing the ability of stock prices to predict consumer confidence measures. The hypothesis that stock prices are transmitted only through the wealth channel is rejected at the national and regional levels. Furthermore, confidence measures respond more strongly to stock prices declines than to increases.

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File URL: http://www1.carleton.ca/economics/ccms/wp-content/ccms-files/cep10-08.pdf
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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 10-08.

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Length: 27 pages
Date of creation: 27 Sep 2010
Date of revision: 26 Aug 2011
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:10-08

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Keywords: Stock market; Consumer confidence; Wealth; Asymmetry;

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References

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  1. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
  2. Flacco, Paul R & Parker, Randall E, 1992. "Income Uncertainty and the Onset of the Great Depression," Economic Inquiry, Western Economic Association International, vol. 30(1), pages 154-71, January.
  3. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  4. W. Jos Jansen & Niek J. Nahuis, 2002. "The Stock Market and Consumer Confidence: European Evidence," MEB Series (discontinued) 2002-11, Netherlands Central Bank, Monetary and Economic Policy Department.
  5. O. David Gulley & Jahangir Sultan, 1998. "Consumer confidence announcements: do they matter?," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 155-166.
  6. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
  7. Matthew Brzozowski & Martin Gervais & Paul Klein & Michio Suzuki, 2010. "Consumption, Income, and Wealth Inequality in Canada," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 52-75, January.
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Cited by:
  1. Emrah İ. Çevik & Turhan Korkmaz & Erdal Atukeren, 2012. "Business confidence and stock returns in the USA: a time-varying Markov regime-switching model," Applied Financial Economics, Taylor & Francis Journals, vol. 22(4), pages 299-312, February.

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