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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.

Suggested Citation

  • Lilia Karnizova & Hashmat Khan, 2010. "The Stock Market and the Consumer Confidence Channel in Canada," Carleton Economic Papers 10-08, Carleton University, Department of Economics, revised 26 Aug 2011.
  • Handle: RePEc:car:carecp:10-08
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    References listed on IDEAS

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    1. Jansen, W. Jos & Nahuis, Niek J., 2003. "The stock market and consumer confidence: European evidence," Economics Letters, Elsevier, vol. 79(1), pages 89-98, April.
    2. 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.
    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. Lise Pichette, 2004. "Are Wealth Effects Important for Canada," Bank of Canada Review, Bank of Canada, vol. 2004(Spring), pages 29-35.
    5. Andy C.C. Kwan & John A. Cotsomitis, 2006. "The Usefulness of Consumer Confidence in Forecasting Household Spending in Canada: A National and Regional Analysis," Economic Inquiry, Western Economic Association International, vol. 44(1), pages 185-197, January.
    6. Farmer, Roger E. A., 2014. "How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies," OUP Catalogue, Oxford University Press, number 9780199360307.
    7. James M. Poterba, 2000. "Stock Market Wealth and Consumption," Journal of Economic Perspectives, American Economic Association, vol. 14(2), pages 99-118, Spring.
    8. O. David Gulley & Jahangir Sultan, 1998. "Consumer confidence announcements: do they matter?," Applied Financial Economics, Taylor & Francis Journals, vol. 8(2), pages 155-166.
    9. 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 154-171, 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.
    2. Kamini Solanki & Yudhvir Seetharam, 2014. "Is consumer confidence an indicator of JSE performance?," Contemporary Economics, University of Finance and Management in Warsaw, vol. 8(3), September.

    More about this item

    Keywords

    Stock market; Consumer confidence; Wealth; Asymmetry;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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