Aggregate Investor Confidence in the Stock Market

Abstract

This paper applies a new measure of aggregate investor confidence, which extracts feedback impulses from stock market data. According to the measure, aggregate investor confidence is positively associated with the profitability of momentum strategies. In a 1927-2014 U.S. sample, aggregate investor confidence requires around 3 months to affect market outcomes notably, and remain statistically significant for up to 16 months. Aggregate investor confidence can also partially explain the size premium, in line with conceptual accounts from prior literature. In aggregate, investors tilt their preference toward small market capitalisation and growth stocks when confidence is high. In contrast to price momentum, aggregate investor confidence affects the size premium immediately.

Keywords: Investor Confidence, Overconfidence, Investor Behaviour, Behavioural Finance, Price Momentum, Asset Pricing

JEL Classification: G11, G12, G14