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On the relationship between stock prices and consumer confidence

University of British Columbia

The purpose of this investigation was to explore the relationship between the general psychological mood of the population regarding the national economy and its effect upon the level of stock market prices. It was hypothesized that there should be evidence of a positive relation between the two. In an effort to explain stock price levels several models were constructed which contained various component variables, among which were an Index of Consumer Mood, GNP, Corporate Earnings Before Tax, Money Supply and Canadian Government Long-Term Bond Interest Rates. All datum covered 38 quarters, from 3rd quarter I960 to 4th quarter 1969. From these variables five models were constructed containing three equations each. Five tests were conducted on the five individual models in which the correlations, multiple regressions and polynomial distributed lags were measured. Various tests contained data based on first differences deflated values, relative differences and combinations thereof. A final test was with the exclusion of the Consumer Mood variable in order to judge the effect its presence had made upon the accuracy of the equations. The conclusions based upon the results of the tests must initially indicate that the general psychological consumer attitude has little bearing upon the level of stock prices. Deflated money supply however, proved to be highly relevant and a valuable predictor. The total picture presented by the models is unsatisfactory, requiring either the substitution of more accurate variables or the inclusion of further data to supplant the inefficiency of the variables that were used. The components employed in the tests were both inefficient in some cases and insufficient in others. The results must only indicate areas for further investigation and refinement of the datum. Any generalization on the lack of statistical support for a relationship between consumer confidence and stock prices to the effect of consumer opinions about the economy as a whole would neither be reasonable nor justifiable at this time.

Text

2011-04-21

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http://hdl.handle.net/2429/33929

Business Administration - Finance

University of British Columbia

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