Working Paper: NBER ID: w10794
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.
Keywords: Investor Sentiment; Consumer Confidence; Closed-End Fund Discount; Financial Markets
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumer confidence (D12) | investor sentiment (G41) |
| CEFD (F36) | investor sentiment (G41) |
| consumer confidence (D12) | financial market outcomes (G19) |
| CEFD (F36) | excess returns for small firms (L25) |
| consumer confidence (D12) | small firm return spread (L25) |