Academic journal article International Journal of Business and Society

Consumer Confidence and Sectoral Stock Returns in China: Evidence from Multi-Resolutions Wavelet and Granger Coherence Analyses

Academic journal article International Journal of Business and Society

Consumer Confidence and Sectoral Stock Returns in China: Evidence from Multi-Resolutions Wavelet and Granger Coherence Analyses

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1.INTRODUCTION

Over the last few decades, the role and development of stock markets has significantly increased across the world economies and market capitalization has witnessed many-fold surge across world stock markets. A developed stock market plays an important role in the financial market and hence contributes to the economic growth and development (Sajjad et al. 2012; Shahbaz et al. 2016b). The development of capital markets has attracted the attention of research to look into linkages of stock markets and real economy. Resultantly, financial economics literature has recorded a handful of studies noting the ability of stock markets to forecast economic growth. In fact, recent financial economics literature considers stock market as a leading indicator of real economy (see for instance, Næ s et al. 2011)1. There are three well-known channels discussed in the theoretical literature that distinguish causal relationship between stock market and real economy namely, wealth effect (consumption-smoothing hypothesis), Investment, and balance sheet channel where credit market imperfection and related consequences are discussed (see for instance, Poterba, 2000; Barnett and Sakellaris, 1998; Bernanke et al. 1999). More recently, consumer's mood and their opinion also provide an indirect link to stock market2. For instance, Ludvigson, (2004) noted that real economic activities and consumer confidence are highly correlated. More specifically, consumer confidence plays important role in the business cycles fluctuations. Blanchard (1993) for instance noted that the consumer confidence may be a cause of correlation between large negative consumption shocks and 1990-1991 recessions.

Since consumer confidence plays a substantial role in the level of economic activities such as consumption and expenditure, hence it is natural to anticipate that consumer confidence also plays a role in the stock market. The intuition behind the role of consumer confidence in stock market follows that, when investors' anticipate fear of worsen economy, they also anticipate the stocks will fall too and they will lose money. This kind of anticipation pushes the investors to sell their stocks and may cause the market to fall (Chen, 2011). In this vein, several studies have empirically examined the link between consumer confidence and investors behavior in the stock market. For instance, Otoo (1999) noted a strong contemporaneous correlation between consumer sentiments and changes in equity values. Jansen and Nahuis (2003) noted a positive correlation between change in the consumer sentiments and 9 out of 11 EU stock markets. Fisher and Statman (2003) noted that consumer confidence is positively correlated with high stock returns, but low stock returns follow high consumer confidence. Lemmon and Portniaguina (2006) conclude that returns of small stocks are forecasted by the consumer confidence and low level of institutional ownership. In a cross- countries setting, Sum (2014) shows that change in consumer confidence has a stronger effect on stock market returns as compared to the change in business confidence. Yacob and Mahdzan (2014) show that consumer sentiments hold significant predictive power driving the volatility of stock market. Ferrer et al. (2016) on the contrary noted that the CCI-stock market relationship is not universally positive. The role of consumer confidence in the stock returns can potentially be linked with the market efficiency phenomenon indirectly. For instance, financial theory suggests that, investors behave rationally in the stock market, however in reality; investors do not entirely act rationally owing to psychological factors that lead to anomalies in the market (Aftab et al. 2016).

Our interest is to empirically examining the role of consumer confidence in stock returns of China's stock market. Since early 1990s, the stock market in china has developed swiftly and in two decades, stock market in china has emerged as largest Asian stock market in term of market capital. …

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