The stock market and consumer confidence: European evidence

Abstract

This paper studies the (short-run) relationship between stock market developments and consumer confidence in 11 European countries over the years 1986–2001. We find that stock returns and changes in sentiment are positively correlated for nine countries, with Germany the main exception. Moreover, stock returns generally Granger-cause consumer confidence at very short horizons (2 weeks–1 month), but not vice versa. The stock market–confidence relationship is driven by expectations about economy-wide conditions rather than personal finances. This suggests that the confidence channel is not part of the conventional wealth effect, but a separate transmission channel.