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Investor Sentiment Measures

  • Lily Qiu
  • Ivo Welch

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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File URL: http://www.nber.org/papers/w10794.pdf
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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
Note: CF AP
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  1. Jonathan Berk & Richard Stanton, 2004. "A Rational Model of the Closed-End Fund Discount," NBER Working Papers 10412, National Bureau of Economic Research, Inc.
  2. 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.
  3. 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.
  4. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  5. 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.
  6. Yacine Ait-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2002. "Luxury Goods and the Equity Premium," Working Papers 145, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  7. 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.
  8. Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
  9. Matthew Spiegel, 1997. "Closed-End Fund Discounts in a Rational Agent Economy," Finance 9712002, EconWPA.
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