Department of Economics and Business Economics

Consumer confidence or the business cycle: What matters more for European expected returns?

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Answer: The business cycle.
We show that consumer confidence and the output gap both excess returns on stocks in many European countries: When the output gap is positive (the economy is doing well), expected returns are low, and when consumer confidence is high, expected returns are also low. Consumer confidence and the output gap are also highly positively correlated. In fact, we find that consumer confidence does not contain independent information (i.e. information over and above that contained by the output gap) about expected returns. Our use of European data allows us to examine both aggregate European and local-country data on consumer confidence and output gaps. We find that even local-country consumer confidence does not contain independent information about expected returns. Our findings have asset pricing implication: We show taht the cross-country distribution of expected returns is better captured when using the European output gap as a risk factor.
Original languageEnglish
JournalJournal of Empirical Finance
Pages (from-to)230-248
Number of pages19
Publication statusPublished - 2014

Bibliographical note

Campus adgang til artiklen / Campus access to the article

    Research areas

  • Time-varying expected returns, Business cycle risk, Output gap, Consumer confidence, Bootstrap, GMM

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