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Using sentiment surveys to predict GDP growth and stock returns

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  • Guzman, Giselle C.

Abstract

This study sheds new light on the question of whether or not sentiment surveys, and the expectations derived from them, are relevant to forecasting economic growth and stock returns, and whether they contain information that is orthogonal to macroeconomic and financial data. I examine 16 sentiment surveys of distinct respondent universes and employ the technique of principal components analysis to extract the common signals from the surveys. I show that the ability of different population groups to anticipate correctly economic growth and excess stock returns is not identical, implying that not all sentiment is the same, although there exist some common components. I demonstrate that sentiment surveys have significant predictive power for both GDP growth and excess stock returns, and that the results are robust to the inclusion of information pertaining to the macroeconomic environment and momentum. Furthermore, the findings reject the conventional wisdom that the effect of sentiment is apparent exclusively in small-capitalization stocks.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36653.

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Date of creation: 31 Oct 2008
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Handle: RePEc:pra:mprapa:36653

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Related research

Keywords: Sentiment; GDP; economic growth; stock returns; return anomaly; predictability; forecasting; principal components analysis; composite factor; surveys; sentiment factor; econometric models; household sentiment; consumer sentiment; business sentiment; asset pricing; alpha; excess returns; small-capitalization stocks; Efficient Markets Hypothesis; Rational Expectations Hypothesis;

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References

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  1. Verma, Rahul & Verma, Priti, 2008. "Are survey forecasts of individual and institutional investor sentiments rational?," International Review of Financial Analysis, Elsevier, Elsevier, vol. 17(5), pages 1139-1155, December.
  2. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1645-1680, 08.
  3. Carroll, Christopher D & Fuhrer, Jeffrey C & Wilcox, David W, 1994. "Does Consumer Sentiment Forecast Household Spending? If So, Why?," American Economic Review, American Economic Association, American Economic Association, vol. 84(5), pages 1397-1408, December.
  4. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
  5. Jason Bram & Sydney Ludvigson, 1997. "Does consumer confidence forecast household expenditure?: A sentiment index horse race," Research Paper, Federal Reserve Bank of New York 9708, Federal Reserve Bank of New York.
  6. E. Philip Howrey, 2001. "The Predictive Power of the Index of Consumer Sentiment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 175-216.
  7. Lee, Wayne Y. & Jiang, Christine X. & Indro, Daniel C., 2002. "Stock market volatility, excess returns, and the role of investor sentiment," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(12), pages 2277-2299.
  8. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.
  9. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  10. Saul H. Hymans, 1970. "Consumer Durable Spending: Explanation and Prediction," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(2), pages 173-206.
  11. Swaminathan, Bhaskaran, 1996. "Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 9(3), pages 845-87.
  12. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  13. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(2), pages 405-440, March.
  14. Jeff Dominitz & Charles F. Manski, 2003. "How Should We Measure Consumer Confidence (Sentiment)? Evidence from the Michigan Survey of Consumers," NBER Working Papers 9926, National Bureau of Economic Research, Inc.
  15. Eric M. Leeper, 1992. "Consumer attitudes: king for a day," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Jul, pages 1-15.
  16. Richard H. Thaler, 2000. "From Homo Economicus to Homo Sapiens," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(1), pages 133-141, Winter.
  17. De Bondt, Werner P. M., 1993. "Betting on trends: Intuitive forecasts of financial risk and return," International Journal of Forecasting, Elsevier, Elsevier, vol. 9(3), pages 355-371, November.
  18. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, American Economic Association, vol. 70(3), pages 393-408, June.
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Cited by:
  1. Giorgio Fagiolo & Andrea Roventini, 2012. "Macroeconomic Policy in DSGE and Agent-Based Models," INET Research Notes 6, Institute for New Economic Thinking (INET).
  2. Guzman, Giselle C., 2011. "The case for higher frequency inflation expectations," MPRA Paper 36656, University Library of Munich, Germany.
  3. Guzman, Giselle C., 2010. "An inflation expectations horserace," MPRA Paper 36511, University Library of Munich, Germany.
  4. Joseph E. Stiglitz, 2011. "Rethinking Macroeconomics: What Failed, And How To Repair It," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 9(4), pages 591-645, 08.

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