The Impact of Consumer Sentiment on the Number of New Home Sales

Abstract

In financial markets the assumption that investors act fully rationally and build their decisions on all available information has often been challenged by phenomena that appear to contradict this paradigm, such as excessive volatility or mean reversion of stock prices. One explanation for these phenomena are the actions of so called noise traders (Black, 1986). Noise traders suffer from cognitive biases, such as overconfidence or overreaction. They rely to some degree on sentiment and disturb the market with their irrational trading. Baker and Wurgler (2007) define investor sentiment as a prospect about the development of future cash flows and investment risks based on information that is not justified by fundamentals. This misguided belief may be based, for example, on general market commentaries.