Investor Sentiment, Stock Markets and Macroeconomic Fluctuation: An Empirical Evidence from US

Recent literature theoretically assumes that exuberant Investors’ sentiments increase the price of capital, signals strong fundamentals of the real side of the economy and drive asymmetric nonlinear asset prices. This study offers empirical insights into the interaction between investor sentiment, financial market, and macroeconomic fluctuation. The objective is achieved by Yamamoto causality test, generalized impulse response function, and variance decomposition, which confirms robust results in multiple perspectives. We employ two indicators for investor sentiment, three stock market indices and seven macroeconomic variables covering the period January 1992 to September 2015. Our results suggest strong evidence on the negative causality from Baker and Wurgler (2006)’s sentiment measures to NASDAQ, and show short run bi-directional influence between VIX and financial market. Vis-à-vis to the spillover effect from financial market to real economic activities, our findings further indicate an observable impact on financial markets on production indicators, such as industrial production and capacity utilization. Overall, our study empirically supports the conceptual work of Benhabib et al. (2016) and validates the impact of sentiment shocks on the real sector and business prices over the business cycle.