Impact of consumer confidence on the expected returns of the Tokyo Stock Exchange: A comparative analysis of consumption and production-based asset pricing models

Abstract

Most single-factor and multifactor asset pricing models constitute special cases of the consumption-based asset pricing theory, in which investors’ marginal utility is the key determinant of asset prices. However, in recent years, production-based asset pricing models have been extraordinarily successful in correctly pricing a wide range of anomaly portfolios that are typically mispriced in previous research. In parallel, research on conditioning information has contributed to significantly improve the performance of classic consumption-based asset pricing models. On this basis, in this paper we conduct an in-depth research on the performance of consumption and production-based asset pricing models on the Tokyo Stock Exchange, for the period from 1992 to 2018, in order to test to what extent consumer confidence helps consumption models to correctly capture shifts in the investment opportunity set of investors. To overcome the constraints imposed by the periodicity of macroeconomic data, we use a factor-mimicking portfolio approach that allows us to test the performance of the models into consideration at different frequencies. Our results suggest that the consumer confidence index for Japan helps consumption-based asset pricing models outperform production-based models for different anomaly portfolios. Conversely, in those cases where consumption models perform worse, the production models also perform poorly. These results help to partially reconcile the results provided by the consumption and production models, and constitute a step forward for the purpose of identifying the fundamental risk factors that drive asset prices.

Are consumer confidence and asset value expectations positively associated with length of daylight?: An exploration of psychological mediators between length of daylight and seasonal asset price transitions

“…Our empirical results suggest that the seasonal cycle of optimism/pessimism for future economy is one of the causes of the seasonal cycle of asset prices, including stock prices. Several studies showed that consumer confidence is reflected in stock prices [ 42 – 44 ]. For example, Lemmon and Portniaguina [ 42 ] showed that the returns of stocks with low institutional ownership, as well as small stocks, are forecast by consumer confidence.…”

“…For example, Lemmon and Portniaguina [ 42 ] showed that the returns of stocks with low institutional ownership, as well as small stocks, are forecast by consumer confidence. More specifically, Rojo-Suárez and Alonso-Conde [ 44 ] showed that consumer confidence in Japan affects the stock prices of the Tokyo Stock Exchange. Based on these studies, it seems reasonable to assume that the seasonal cycle of people’s optimism/pessimism exemplified by the CCI (AVE) is one of the causes of asset price transitions in Japan.…”

The Effect of Consumer Confidence and Subjective Well-being on Consumers’ Spending Behavior

“…Mourougane and Roma ( 2003 ), Chua and Tsiaplias ( 2009 ), and Utaka ( 2014 ) consider the CCI a relevant predictor of the short-term growth in gross domestic product. Lemmon and Portniaguina ( 2006 ), Chen ( 2011 ), Hsu et al ( 2011 ), and Rojo-Suárez and Alonso-Conde ( 2020 ) indicate that changes in the consumer confidence Granger-cause stock returns. Vuchelen ( 2004 ), Kwan and Cotsomitis ( 2006 ), Mandal and McCollum ( 2013 ), Kłopocka ( 2017 ), Pan ( 2018 ), Karasoy Can and Yüncüler ( 2018 ), Claveria ( 2019 ), and Acuña et al ( 2020 ) found a negative causality between the consumer confidence and the unemployment rate both in the short run and long run.…”

Entropy-based financial asset pricing: Evidence from Pakistan

“…They provide a range of entropy measurements. In the case of [ 20 ] For the capital asset assessment model and the Fama French three and five factor models, their results reveal that the entropy piece is indisputably compared to the GLS R2 estimate [ 21 ]. When a quantile relapse increases, the CAPM beta danger turns into a varied positive.…”