How Influential the Market Confidence in Determining the Global Stock Returns

Abstract

Market confidence and investment behavior and decision are closely related. This study conducts an empirical analysis to examine how influential the market confidence (consumer and business levels) in determining the performance of global stock returns. Specifically, the study seeks to reveal if market confidence has asymmetric influences on stock return and how the effect changes across sectors. For the purpose of analysis, we utilize the nonlinear autoregressive distributed lags (NARDL) model by examining the ten sectoral global Morgan Stanley Capital
International (MSCI) monthly data ranging from the year 1995 to 2016. Our results showed that both consumer and business confidences have asymmetric effects and their impacts are captured in both short-term and long-term. In particular, the impact of consumer confidence is relatively larger than that of business confidence and varied across sectors. The increase of business confidence leads to higher stock returns in the sector of energy, financials, health care, and utilities while the increase in consumer confidence improves the return of health care and real estate. On the other hand, the decrease of consumer confidence imposes a negative impact on the return of energy, financials, industry, and utilities. In general, the energy and industry sectors are more affected by market confidence while no long-run impact is found in communication services and information technology sectors.