Investor sentiment and global economic conditions

Miguel C. Herculano and Eva Lütkebohmert

Journal of Empirical Finance, 2023, vol. 73, issue C, 134-152

Abstract: The paper examines the macroeconomic relevance of the common component of discount rate news in firm-level stock returns for G7 countries (except for Italy, focusing on each country’s index constituents) by applying a hierarchical dynamic factor model to the Campbell and Ammer (1993) return decomposition. This approach offers advantages over alternative investor sentiment indicators and is easily extended to a larger cross-section of countries. Evidence suggests global investor sentiment leads, rather than lags, domestic sentiment and global economic conditions. Investor sentiment predicts economic conditions in-sample and out-of-sample.

Keywords: Business cycles; Hierarchical dynamic factor model; Stock market sentiment (search for similar items in EconPapers)
JEL-codes: C32 E32 E51 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:73:y:2023:i:c:p:134-152

DOI: 10.1016/j.jempfin.2023.06.001

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