Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-10T20:39:54.278Z Has data issue: false hasContentIssue false
  • English
  • Français

HOW DOES THE MACROECONOMY RESPOND TO STOCK MARKET FLUCTUATIONS? THE ROLE OF SENTIMENT

Published online by Cambridge University Press:  06 June 2018

Wei-Fong Pan
Wei-Fong Pan*
Affiliation:
First Capital Securities Co., Ltd.
*
Address correspondence to: Wei-Fong Pan, Research Institute, First Capital Securities Co., Ltd., 18/F, Investment Bank Building, No. 115 Fuhua 1st Rd., Futian Dist., Shenzhen, China; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This study estimates the response of macroeconomic variables to stock market fluctuations in Japan and the United States. It emphasizes the economy's reaction to stock market bubbles and crashes. To do this, I propose a new way to identify bubbles and crashes by testing price-to-fundamental ratios using the newly developed trend-filtering approach. Regardless of the measures used, both countries' macroeconomy tends to respond positively to the positive shock of stock price. Asymmetric effects of the stock market are observed. Japan's macroeconomic variables, especially investment and industrial production, are more sensitive to market crashes, while those of the United States are more sensitive to stock bubbles. Finally, I provide evidence that market sentiment can affect the economy either directly or indirectly through the stock market.

Keywords

Asset BubblesCrashesImpulse ResponseMacroeconomy
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 421 - 446
Copyright
© Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Acemoglu, Daron and Scott, Andrew (1994) Consumer confidence and rational expectations: Are agents' beliefs consistent with the theory? Economic Journal 104, 1–19.CrossRefGoogle Scholar
Akerlof, George A. and Shiller, Robert J. (2010) Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism. Princeton, NJ: Princeton University Press.Google Scholar
Anundsen, André K., Gerdrup, Karsten, Hansen, Frank, and Kragh-Sørensen, Kasper (2016) Bubbles and crises: The role of house prices and credit. Journal of Applied Econometrics 31 (7), 1291–1311.CrossRefGoogle Scholar
Baker, Malcolm and Wurgler, Jeffrey (2006) Investor sentiment and the cross-section of stock returns. Journal of Finance 61 (4), 1645–1680.CrossRefGoogle Scholar
Baker, Malcolm and Wurgler, Jeffrey (2007) Investor sentiment in the stock market. Journal of Economic Perspectives 21 (2), 129–152.CrossRefGoogle Scholar
Barnichon, Regis (2010) Building a composite help-wanted index. Economics Letters 109 (3), 175–178.CrossRefGoogle Scholar
Bernanke, Ben S. and Gertler, Mark (1989) Agency costs, net worth, and business fluctuations. American Economic Review 79 (1), 14–31.Google Scholar
Bernanke, Ben S., Gertler, Mark, and Gilchrist, Simon (1999) The financial accelerator in a quantitative business cycle framework. Handbook of Macroeconomics 1, 1341–1393.CrossRefGoogle Scholar
Bjørnland, Hilde C. (2000) Detrending methods and stylized facts of business cycles in Norway – An international comparison. Empirical Economics 25 (3), 369–392.Google Scholar
Bloom, Nicholas (2009) The impact of uncertainty shocks. Econometrica 77 (3), 623–685.Google Scholar
Borio, Claudio E.V. and Lowe, Philip W. (2002) Asset Prices, Financial and Monetary Stability: Exploring the Nexus. BIS working paper 114, Basel: Bank of International Settlements.CrossRefGoogle Scholar
Brunnermeier, Markus K. and Oehmke, Martin (2013) Bubbles, financial crises, and systemic risk. In Constantinides, G. M., Harris, M., and Stulz, R. M. (eds.), Handbook of the Economics of Finance, pp. 1221–1288. Amsterdam: Elsevier.Google Scholar
Caballero, Ricardo J. and Krishnamurthy, Arvind (2006) Bubbles and capital flow volatility: Causes and risk management. Journal of Monetary Economics 53 (1), 35–53.CrossRefGoogle Scholar
Carlstrom, Charles T. and Fuerst, Timothy S. (1997) Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis. American Economic Review 87, 893–910.Google Scholar
Carroll, Christopher D., Otsuka, Misuzu, and Slacalek, Jiri (2011) How large are housing and financial wealth effects? A new approach. Journal of Money, Credit and Banking 43 (1), 55–79.CrossRefGoogle Scholar
Caspi, Itamar and Graham, Meital (2017) Testing for bubbles in stock markets with irregular dividend distribution. Finance Research Letters. https://doi.org/10.1016/j.frl.2017.12.015Google Scholar
Chauvet, Marcelle and Guo, Jang-Ting (2003) Sunspots, animal spirits, and economic fluctuations. Macroeconomic Dynamics 7 (1), 140–169.CrossRefGoogle Scholar
Christiano, Lawrence J., Motto, Roberto, and Rostagno, Massimo (2014) Risk shocks. American Economic Review 104 (1), 27–65.CrossRefGoogle Scholar
Diamond, Peter A. (1965) National debt in a neoclassical growth model. American Economic Review 55 (5), 1126–1150.Google Scholar
Farhi, Emmanuel and Tirole, Jean (2011) Bubbly liquidity. Review of Economic Studies 79 (2), 678–706.CrossRefGoogle Scholar
Farmer, Roger E.A. (2012) The stock market crash of 2008 caused the Great Recession: Theory and evidence. Journal of Economic Dynamics and Control 36 (5), 693–707.CrossRefGoogle Scholar
Farmer, Roger E.A. (2013) Animal spirits, financial crises and persistent unemployment. Economic Journal 123 (568), 317–340.CrossRefGoogle Scholar
Farmer, Roger E.A. (2015) The stock market crash really did cause the great recession. Oxford Bulletin of Economics and Statistics 77 (5), 617–633.CrossRefGoogle Scholar
Farmer, Roger E.A. and Guo, Jang-Ting (1994) Real business cycles and the animal spirits hypothesis. Journal of Economic Theory 63 (1), 42–72.CrossRefGoogle Scholar
Futagami, Koichi and Shibata, Akihisa (2000) Growth effects of bubbles in an endogenous growth model. Japanese Economic Review 51 (2), 221–235.CrossRefGoogle Scholar
Goodhart, Charles and Hofmann, Boris (2008) House prices, money, credit, and the macroeconomy. Oxford Review of Economic Policy 24 (1), 180–205.CrossRefGoogle Scholar
Granger, Clive W. J. (1969) Investigating causal relations by econometric models and cross-spectral methods. Econometrica 37 (3), 424–438.CrossRefGoogle Scholar
Grossman, Gene M. and Yanagawa, Noriyuki (1993) Asset bubbles and endogenous growth. Journal of Monetary Economics 31 (1), 3–19.CrossRefGoogle Scholar
Hamilton, James D. (2017) Why you should never use the Hodrick–Prescott filter. Review of Economics and Statistics. https://doi.org/10.1162/REST_a_00706Google Scholar
Hashimoto, Ken-ichi and Im, Ryonghun (2016) Bubbles and unemployment in an endogenous growth model. Oxford Economic Papers 68 (4), 1084–1106.CrossRefGoogle Scholar
Herwartz, Helmut and Kholodilin, Konstantin A. (2014) In-sample and out-of-sample prediction of stock market bubbles: Cross-sectional evidence. Journal of Forecasting 33 (1), 15–31.CrossRefGoogle Scholar
Hodrick, Robert J. and Prescott, Edward C. (1997) Postwar US business cycles: An empirical investigation. Journal of Money, Credit and Banking 29 (1), 1–16.CrossRefGoogle Scholar
Howrey, E. Philip (2001) The predictive power of the index of consumer sentiment. Brookings Papers on Economic Activity 2001 (1), 175–207.CrossRefGoogle Scholar
Jansen, W. Jos and Nahuis, Niek J. (2003) The stock market and consumer confidence: European evidence. Economics Letters 79 (1), 89–98.CrossRefGoogle Scholar
Jermann, Urban and Quadrini, Vincenzo (2012) Macroeconomic effects of financial shocks. American Economic Review 102 (1), 238–271.CrossRefGoogle Scholar
Jordà, Òscar (2005) Estimation and inference of impulse responses by local projections. American Economic Review 95 (1), 161–182.CrossRefGoogle Scholar
Jordà, Òscar (2009) Simultaneous confidence regions for impulse responses. The Review of Economics and Statistics 91 (3), 629–647.CrossRefGoogle Scholar
Jordà, Òscar, Schularick, Moritz, and Taylor, Alan M. (2015) Leveraged bubbles. Journal of Monetary Economics 76, S1–S20.CrossRefGoogle Scholar
Kaas, Leo, Pintus, Patrick A., and Ray, Simon (2016) Land collateral and labor market dynamics in France. European Economic Review 84, 202–218.CrossRefGoogle Scholar
Keynes, John M. (1936) The General Theory of Employment, Interest and Money. London: Macmillan and Co., Ltd.Google Scholar
Kindleberger, Charles P. and Aliber, Robert Z. (2005) Manias, Panics and Crashes: A History of Financial Crisis, 5th ed.Hoboken, NJ: John Wiley and Sons, Ltd.CrossRefGoogle Scholar
King, Ian and Ferguson, Don (1993). Dynamic inefficiency, endogenous growth, and Ponzi games. Journal of Monetary Economics 32 (1), 79–104.CrossRefGoogle Scholar
Kiyotaki, Nobuhiro and Moore, John (1997) Credit cycles. Journal of Political Economy 105 (2), 211–248.CrossRefGoogle Scholar
Kunieda, Takuma and Shibata, Akihisa (2016) Asset bubbles, economic growth, and a self-fulfilling financial crisis. Journal of Monetary Economics 82, 70–84.CrossRefGoogle Scholar
Lettau, Martin and Ludvigson, Sydney (2001) Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56 (3), 815–849.CrossRefGoogle Scholar
Lettau, Martin and Ludvigson, Sydney C. (2004) Understanding trend and cycle in asset values: Reevaluating the wealth effect on consumption. American Economic Review 94 (1), 276–299.CrossRefGoogle Scholar
Liu, Zheng, Miao, Jianjun, and Zha, Tao (2016) Land prices and unemployment. Journal of Monetary Economics 80, 86–105.CrossRefGoogle Scholar
Ludwig, Alexander and Sløk, Torsten (2004) The relationship between stock prices, house prices and consumption in OECD countries. The B.E. Journal of Macroeconomics 4 (1), 1–28.Google Scholar
Martin, Alberto and Ventura, Jaume (2012) Economic growth with bubbles. American Economic Review 102 (6), 3033–3058.CrossRefGoogle Scholar
Matsusaka, John G. and Sbordone, Argia M.. (1995) Consumer confidence and economic fluctuations. Economic Inquiry 33 (2), 296–318.CrossRefGoogle Scholar
Mendoza, Enrique G. and Terrones, Marco E. (2008) An Anatomy of Credit Booms: Evidence From Macro Aggregates and Micro Data. National Bureau of Economic Research working paper 14049.CrossRefGoogle Scholar
Miao, Jianjun and Wang, Pengfei (2011) Bubbles and Credit Constraints. Mimeo, Boston University.CrossRefGoogle Scholar
Miao, Jianjun, Wang, Pengfei, and Xu, Lifang (2016) Stock market bubbles and unemployment. Economic Theory 61 (2), 273–307.CrossRefGoogle Scholar
Okina, Kunio, Shirakawa, Masaaki, and Shiratsuka, Shigenori (2001) The asset price bubble and monetary policy: Japan's experience in the late 1980s and the lessons. Monetary and Economic Studies (Special Edition) 19 (2), 395–450.Google Scholar
Pan, Wei-Fong (2018) Does the stock market really cause unemployment? A cross-country analysis. North American Journal of Economics and Finance 44 (4), 34–43.CrossRefGoogle Scholar
Perli, Roberto (1998) Indeterminacy, home production, and the business cycle: A calibrated analysis. Journal of Monetary Economics 41 (1), 105–125.CrossRefGoogle Scholar
Phillips, Peter C.B., Shi, Shuping, and Yu, Jun (2015) Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500. International Economic Review 56 (4), 1043–1078.CrossRefGoogle Scholar
Phillips, Peter C.B., Wu, Yangru, and Yu, Jun (2011) Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values? International Economic Review 52 (1), 201–226.CrossRefGoogle Scholar
Qiu, Lily and Welch, Ivo (2004) Investor Sentiment Measures. National Bureau of Economic Research working paper 10794.CrossRefGoogle Scholar
Ravn, Morten O. and Uhlig, Harald (2002) On adjusting the Hodrick–Prescott filter for the frequency of observations. Review of Economics and Statistics 84 (2), 371–376.CrossRefGoogle Scholar
Soytas, Ugur, Sari, Ramazan, and Ewing, Bradley T. (2007) Energy consumption, income, and carbon emissions in the United States. Ecological Economics 62 (3–4), 482–489.CrossRefGoogle Scholar
Takao, Kizuku (2017) Asset bubbles and economic growth under endogenous market structure. Macroeconomic Dynamics. DOI: 10.1017/S1365100517000712Google Scholar
Tirole, Jean (1985) Asset bubbles and overlapping generations. Econometrica 53 (6), 1499–1528.CrossRefGoogle Scholar
Toda, Hiro Y. and Yamamoto, Taku (1995) Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics 66 (1–2), 225–250.CrossRefGoogle Scholar
Ventura, Jaume (2012) Bubbles and capital flows. Journal of Economic Theory 147 (2), 738–758.CrossRefGoogle Scholar
Vuillemey, Guillaume and Wasmer, Etienne (2017) Frictional Unemployment with Stochastic Bubbles. Institute for the Study of Labor (IZA) discussion papers.CrossRefGoogle Scholar
Weder, Mark (2000) Animal spirits, technology shocks and the business cycle. Journal of Economic Dynamics and Control 24 (2), 273–295.CrossRefGoogle Scholar
Weil, Philippe (1987) Confidence and the real value of money in an overlapping generations economy. Quarterly Journal of Economics 102 (1), 1–22.CrossRefGoogle Scholar
Zapata, Hector O. and Rambaldi, Alicia N. (1997) Monte Carlo evidence on cointegration and causation. Oxford Bulletin of Economics and Statistics 59 (2), 285–298.CrossRefGoogle Scholar