Abstract. Earlier research finds correlation between sentiment and future economic growth, but disagrees on the channel that explains this result. We shed new light on this issue by exploiting cross-sectional variation in country size and market efficiency. We find that sentiment shocks in the largest advanced economies increase economic activity, but only temporarily and without affecting productivity. Conversely, sentiment shocks in smaller or less advanced economies predict prolonged economic growth and a corresponding increase in productivity. The results support the view that sentiment can create economic booms, although only in economies where sentiment and fundamentals are harder to disentangle.
Coauthors. George Constantinides (University of Chicago, NBER), Valerio Potì (University College Dublin), and Stella Spilioti (University of Athens).
Manuscript. You can find the latest draft here, and a synopsis here.
Working paper series. NBER Working Paper w31031; Becker Friedman Institute Working Paper No. 2023-40; Michael J. Brennan Research Paper No. 22-8.
Presentations. The Finance, Economics, and Banking Research Network (FEB-RN), Ball State University, the Northern Finance Association meetings, the International Conference on Empirical Economics at Pennsylvania State University, the European Financial Management Association Meetings at the University of Lisbon, the University of Michigan, the American Economic Association meetings, HEC Liège, the Finance Forum at the University of Málaga, the Multinational Finance Society Conference, the European Economics and Finance Society Conference, the Behavioral Finance Working Group Conference, the Financial Markets and Corporate Governance conference at Deakin University, the Australasian Finance and Banking Conference at UNSW Sydney, Utrecht University, the Workshop on Economic Growth and Macroeconomic Dynamics at the University of Rome "La Sapienza," and the Research in Behavioral Finance Conference at VU Amsterdam.
Awards. Best quantitative paper award at the 2023 Behavioral Finance Working Group conference.
Publication. Journal of Financial and Quantitative Analysis, forthcoming.