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Consumer Confidence and Stock Markets: The Panel Causality Evidence

DOI: 10.5539/ijef.v3n6p91

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Abstract:

This paper uses a panel of country-level data to investigate the causal relationship between the consumer confidence index (CCI) and the stock market index (SMI). We apply the common correlated effects mean group (CCEMG) estimation of Pesaran (2006) to capture the cross-sectional dependence of our variables before examining this causal relationship. In the panel data analysis, we discover the two-way causality between the CCI and SMI. One of the ways is where stock returns Granger-cause the changes in the CCI. According to the information view of the CCI, this result is due to consumers regarding the stock returns as being the leading indicators of the future situation, regardless of whether they own the stocks or not. On the other hand, the changes in the CCI also Granger-cause the stock returns, the reason for this being attributable to the animal spirits view of consumers. When consumers believe in their own opinions, they will at the same time have strong confidence in and an optimistic attitude toward the future economic situation. Based on these conditions, consumers will invest more in the stock market.

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