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Do Stock Market Risk Premiums Respond to Consumer Confidence?

Author

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  • Chowdhury, Abdur

    (Department of Economics Marquette University)

Abstract

During the 2007-9 Great Recession, the risk premium associated with U.S. stocks sharply increased and has since remained significantly higher compared to its range during the last 40 years. The increase in the equity risk premium has led many analysts to believe that risk aversion among stock investors has moved to a permanently higher range in recent years. Our empirical findings show that the recent increase in the equity risk premium primarily reflects a temporary collapse in consumer confidence. As long as the consumer confidence in the sustainability of economic recovery remains low, today's elevated risk premium would persist. Once the confidence level starts to recover - as it has done after every recession since the 1960s - the required return among stock market investors should also diminish.

Suggested Citation

  • Chowdhury, Abdur, 2011. "Do Stock Market Risk Premiums Respond to Consumer Confidence?," Working Papers and Research 2011-06, Marquette University, Center for Global and Economic Studies and Department of Economics.
    • Handle: RePEc:mrq:wpaper:2011-06
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    File URL: http://epublications.marquette.edu/econ_workingpapers/17
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    More about this item

    Keywords

    Risk Premium; Consumer Confidence; Equity Market; Risk Aversion; Great Recession;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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