As an analyst in the finance and economics field, I recently came across an insightful paper titled "Consumer confidence and asset prices: An analysis of consumption and production-based asset pricing models on the Tokyo Stock Exchange," published in PLOS ONE by Xiaochen He, Xiaojun Zhao, and Xiaojing Zhang. Their research provided the foundation for my exploration of the performance of consumption and production-based asset pricing models on the Tokyo Stock Exchange, for the period from 1992 to 2018, and their insights were invaluable in helping me understand the importance of consumer confidence as an explanatory factor in asset pricing models.
Consumer confidence is an essential determinant of asset prices, as it captures the expectations of consumers regarding their future income and consumption. When consumer confidence is high, consumers are more likely to spend money on goods and services, which leads to higher economic growth and higher asset prices. Moreover, it is also a determinant of the investment opportunity set of investors, as high consumer confidence can lead investors to invest in riskier assets that are expected to benefit from higher economic growth.
The consumption-based asset pricing model has been widely used in finance and economics to determine asset prices, assuming that the marginal utility of consumption is the key determinant of asset prices. However, the paper's authors challenged this assumption and proposed the production-based asset pricing model as an alternative, showing that the production-based asset pricing model is more successful in pricing assets that are typically mispriced by the consumption-based asset pricing model.
To test the performance of the models, the authors used a factor-mimicking portfolio approach, which allowed them to test the models' performance at different frequencies. Their results suggest that the consumer confidence index for Japan helps consumption-based asset pricing models outperform production-based models for different anomaly portfolios. Conversely, in those cases where consumption models perform worse, the production models also perform poorly. These findings help to partially reconcile the results provided by the consumption and production models and represent a significant step forward in identifying the fundamental risk factors that drive asset prices.
In conclusion, I would like to give credit to Xiaochen He, Xiaojun Zhao, and Xiaojing Zhang for their valuable contributions to the field of asset pricing through their insightful paper. Their research highlights the importance of taking consumer confidence into account when developing asset pricing models, and their findings can help investors make more informed investment decisions.
Readers who are interested in reading the full paper by Xiaochen He, Xiaojun Zhao, and Xiaojing Zhang can access it at the following link: https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0241318. The paper provides an in-depth analysis of the performance of consumption and production-based asset pricing models on the Tokyo Stock Exchange and highlights the importance of consumer confidence as an explanatory factor in asset pricing models. It is a fascinating read for anyone interested in finance and economics.