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Investor Sentiment Measures

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  • Lily Qiu
  • Ivo Welch

Abstract

This paper compares investor sentiment measures based on consumer confidence surveys with measures extracted from the closed-end fund discount (CEFD). Our evidence suggests that these two kinds of sentiment measures do not correlate well with one another. For a short 2 - 4 year period in which we have direct investor sentiment survey data from UBS/Gallup, only the consumer confidence correlates well with investor sentiment. Further, only the consumer confidence based measure can robustly explain the small-firm return spread and the return spread between stocks held disproportionately by retail investors and those held by institutional investors. Surprisingly, there is even a hint that the consumer confidence measure can explain closed-end fund IPO activity, while the CEFD cannot. In sum, our evidence supports the view that sentiment plays a role in financial markets, but that the CEFD may be the wrong measure of sentiment.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10794.

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Date of creation: Sep 2004
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Handle: RePEc:nbr:nberwo:10794

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  1. John A. Doukas & Nikolaos T. Milonas, 2004. "Investor Sentiment and the Closed-end Fund Puzzle: Out-of-sample Evidence," European Financial Management, European Financial Management Association, vol. 10(2), pages 235-266.
  2. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
  3. Jonathan Berk & Richard Stanton, 2004. "A Rational Model of the Closed-End Fund Discount," NBER Working Papers 10412, National Bureau of Economic Research, Inc.
  4. Chen, Nai-fu & Kan, Raymond & Miller, Merton H, 1993. " Are the Discounts on Closed-End Funds a Sentiment Index?," Journal of Finance, American Finance Association, vol. 48(2), pages 795-800, June.
  5. Yacine A�T-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2004. "Luxury Goods and the Equity Premium," Journal of Finance, American Finance Association, vol. 59(6), pages 2959-3004, December.
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  7. Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991. " Investor Sentiment and the Closed-End Fund Puzzle," Journal of Finance, American Finance Association, vol. 46(1), pages 75-109, March.
  8. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, EconWPA.
  9. Matthew Spiegel., 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Research Program in Finance Working Papers RPF-276, University of California at Berkeley.
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Cited by:
  1. Tang, Dragon Yongjun & Yan, Hong, 2008. "Market conditions, default risk and credit spreads," Discussion Paper Series 2: Banking and Financial Studies 2008,08, Deutsche Bundesbank, Research Centre.
  2. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
  3. Gene Amromin & Steven Sharpe, 2012. "From the horse’s mouth: how do investor expectations of risk and return vary with economic conditions?," Working Paper Series WP-2012-08, Federal Reserve Bank of Chicago.
  4. Burdekin, Richard C.K. & Redfern, Luke, 2009. "Sentiment effects on Chinese share prices and savings deposits: The post-2003 experience," China Economic Review, Elsevier, vol. 20(2), pages 246-261, June.
  5. M. Zouaoui & G. Nouyrigat & F. Beer, 2010. "How does investor sentiment affect stock market crises? Evidence from panel data," Post-Print halshs-00534754, HAL.
  6. Gene Amromin & Steven A. Sharpe, 2008. "Expectations of risk and return among household investors: Are their Sharpe ratios countercyclical?," Finance and Economics Discussion Series 2008-17, Board of Governors of the Federal Reserve System (U.S.).

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