The Making of National Economic Forecasts
Edited by Lawrence R. Klein
Extract
1 Giselle Guzmán 1. INTRODUCTION The American Heritage Dictionary defines ‘sentiment’ as ‘a thought, view, or attitude, especially one based mainly on emotion instead of reason.’ By the same token, it defines something that is ‘not endowed with reason’ to be ‘irrational.’ Hence, ‘sentiment’ is largely regarded as ‘emotional’ and ‘irrational.’ Classical asset pricing theory makes no provision for such an irrational component in determining asset prices, particularly in long-run equilibrium. Yet it remains a favorite statistic for financial media and popular press, and is the source of endless commentary by market pundits and economists alike. Indeed, the financial press often credits or blames ‘sentiment’ for a rising or falling stock market. If markets do, in fact, react to reports of changes in sentiment, then this indicates that the reality of asset pricing contradicts the theory of asset pricing. This suggests an oversight on the part of the academic literature in failing to give sentiment the importance it may warrant in the theory of asset pricing. Academics have only recently begun to examine what role, if any, sentiment may have in the theory of asset pricing. However, consensus is lacking regarding its most basic characteristics. The literature remains divided not only about whether or not sentiment matters for asset prices, but also about what sentiment actually is, and how best to measure and incorporate it in a theoretical framework. I focus here on the empirical aspects of sentiment, its measurement and its predictive power for the real economy as...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.