Does the Market Drive the Animal Spirits? A Cointegration Analysis

Abstract

This paper studies different relationships in the US between consumer sentiment and stock returns. The study adds to the existing literature by exploring the long run relationship between consumer sentiment and stock returns while expanding on previous research. The paper shows that short-term changes in consumer sentiment are caused by changes in stock returns, and not vice versa. Additionally, causality tests suggest that stock returns drive consumer sentiment in the long run. it appears that US consumers’ assurance in the economic condition depend on their future belief in one of the leading economic indicators