Who Influences Who? The Relation Between Index Returns and Consumption Surveys

Abstract

The consumption model of asset prices is based on consumption expectations being the determinant of asset prices. By using consumer and business confidence surveys for 10 countries, with the corresponding stock market indexes, it is shown the stock market indexes to influence the surveys more than the other way around. This result suggests consumers and businesses using the stock market as a barometer for the state of the economy, which could affect the results of regressions where the return on the stock market is the dependent variable and consumption changes the independent variable.