Changes in the risk structure of stock returns: Consumer Confidence and the dotcom bubble |
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Authors: | Lawrence Leger Vitor Leone |
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Institution: | aDepartment of Economics, Loughborough University, Leicestershire, LE11 3TU, UK;bEconomics & Real Estate Forecasting Team, DTZ, 3-5 Swallow Place, London, W1A 4NA, UK |
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Abstract: | Changes in the risk structure of stock returns may sometimes be very revealing. We examine economic variables that help explain principal components in UK stock returns, 01/1985 to 12/2001. The loading pattern on explanatory variables for the first component in a ‘bubble’ period is distinctive and consistent with a bubble/crash market. The second component shows a loading pattern on a Consumer Confidence variable in a pre-bubble period only. We observe apparently systematic changes in the structure of risk, and conjecture that Consumer Confidence captures a change in market sentiment that could be a signal for the evolution of stock prices. |
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Keywords: | Macroeconomic variables Consumer Confidence Stock returns Principal components analysis |
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