Do Economic Surprises Affect Stock Returns? The Role of Sentiment

We test whether the effect of macroeconomic surprises on stock returns is impacted by positive or negative investor sentiment, proxied by daily sentiment by Federal Reserve Bank of San Francisco. We employ an event study methodology with separate regressions for six real economic indicators: GDP, industrial production, unemployment, retail sales, durable goods, and continuing jobless claims. We regress the daily stock returns for release dates of macroeconomic indicators on macroeconomic surprises. We test whether a bullish or bearish view about the stock market affects the portfolio choices of investors in response to unexpected macroeconomic news. We find evidence of an asymmetric effect of investor sentiment on the relation between macroeconomic surprises and stock returns.