Using sentiment surveys to predict GDP growth and stock returns
This study sheds new light on the question of whether or not sentiment surveys, and the expectations derived from them, are relevant to forecasting economic growth and stock returns, and whether they contain information that is orthogonal to macroeconomic and financial data. I examine 16 sentiment surveys of distinct respondent universes and employ the technique of principal components analysis to extract the common signals from the surveys. I show that the ability of different population groups to anticipate correctly economic growth and excess stock returns is not identical, implying that not all sentiment is the same, although there exist some common components. I demonstrate that sentiment surveys have significant predictive power for both GDP growth and excess stock returns, and that the results are robust to the inclusion of information pertaining to the macroeconomic environment and momentum. Furthermore, the findings reject the conventional wisdom that the effect of sentiment is apparent exclusively in small-capitalization stocks.
C51 - Model Construction and Estimation, E21 - Consumption; Saving; Wealth, G00 - General, E47 - Forecasting and Simulation: Models and Applications, E66 - General Outlook and Conditions, D84 - Expectations; Speculations, E17 - Forecasting and Simulation: Models and Applications, E44 - Financial Markets and the Macroeconomy, O40 - General, G01 - Financial Crises, D03 - Behavioral Economics; Underlying Principles, C13 - Estimation: General, C22 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models, D83 - Search; Learning; Information and Knowledge; Communication; Belief, C81 - Methodology for Collecting, Estimating, and Organizing Microeconomic Data, C42 - Survey Methods, E37 - Forecasting and Simulation: Models and Applications, C01 - Econometrics, Y40 - Dissertations (unclassified), C12 - Hypothesis Testing: General, E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, D53 - Financial Markets, E27 - Forecasting and Simulation: Models and Applications, C02 - Mathematical Methods, G14 - Information and Market Efficiency; Event Studies, C43 - Index Numbers and Aggregation, C82 - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data, C63 - Computational Techniques; Simulation Modeling, E60 - General, G12 - Asset Pricing; Trading volume; Bond Interest Rates, C53 - Forecasting and Prediction Methods; Simulation Methods, E32 - Business Fluctuations; Cycles, D12 - Consumer Economics: Empirical Analysis, G10 - General
DOI identifier: 10.4337/9781849802161.00017