Consumer sentiment has the ability to provide researchers with many avenues to test existing
Finance and Economic theories. Chapter 1 introduces the issues that I seek to explore within the area of
Behavioral Finance. Chapter 2 utilizes thirty years of consumer sentiment data to explore extant
economic theories and hypotheses. In particular, I study the Prospect Theory and the Life Cycle
Investment Hypothesis. In addition, I also study how changes in consumer sentiment can foretell future
stock returns for firms in different industries and of different sizes.
By studying how individuals of different ages display optimism and pessimism through consumer
sentiment surveys, I am able to contribute to the literature by shedding additional light on just how the
important age is with respect to a person’s economic outlook. One particular phenomenon that I discuss in
this chapter is downside risk. I will provide further support to the existing literature which shows that
gains and losses are not viewed equally by individuals. To account for this discrepancy, this paper models
the time series relationship between consumer sentiment and stock returns using asymmetric response
models.