Sensitivity of Consumer Confidence to Stock Markets' Meltdowns

Elena Ferrer, Julie M. Salaber, Anna Zalewska
2012 Social Science Research Network  
Using European and US data over the period 1990-2010 we study the stock marketconsumer confidence relationship (SM-CC). We argue that if consumers use stock markets to predict future economic conditions the SM-CC relationship should be weaker during stock market declines which are not followed by economic turbulences. We use the post Dot-Com stock market crash and the stock market crash of the Financial Crisis to test our hypothesis. In contrast with the literature on financial illiteracy of
more » ... sumers we find that consumers correctly interpret stock market meltdowns. We also find a strong information effect, i.e., stock markets indirectly impact on consumers' expectations of household finances. This contrasts with previous studies which find that the information effect is weak or non-existent.
doi:10.2139/ssrn.2011762 fatcat:kusefch6azeabm5rpvkshktuhe