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The Role of Consumer Sentiment in the Stock Market: A Multivariate Dynamic Mixture Model with Threshold Effects

Author

Listed:
  • Zacharias Psaradakis
  • Martin Sola
  • Francisco Rapetti
  • Patricio Yunis

Abstract

We consider the relationship between stock prices, volatility and consumer sentiment. The analysis is based on a new multivariate model defined as a time-varying mixture of dynamic models in which instantaneous relationships among variables are allowed and the mixing weights have a threshold-type structure. We discuss issues related to the stability of the model and estimation of its parameters. Our empirical results show that consumer sentiment affects significantly the S&P 500 price–dividend ratio and market volatility in at least one of the two regimes identified by the model, regimes which are associated with endogenously determined low and high consumer sentiment.

Suggested Citation

  • Zacharias Psaradakis & Martin Sola & Francisco Rapetti & Patricio Yunis, 2024. "The Role of Consumer Sentiment in the Stock Market: A Multivariate Dynamic Mixture Model with Threshold Effects," Department of Economics Working Papers 2024_01, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2024_01
    as

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    File URL: https://www.utdt.edu/download.php?fname=_173100612463450200.pdf
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    References listed on IDEAS

    as
    1. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    2. Luca Brugnolini, 2018. "About Local Projection Impulse Response Function Reliability," CEIS Research Paper 440, Tor Vergata University, CEIS, revised 09 Jun 2018.
    3. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    4. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
    5. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumer sentiment; Mixture models; Price–dividend ratio; Threshold; Time-varying weights; Volatility.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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