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A Note on Confidence Momentum and Term Structure of Confidence with Applications to Financial Markets

7 Pages Posted: 13 Feb 2012 Last revised: 9 Nov 2012

G. Charles-Cadogan

Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management; UCT - School of Economics

Date Written: April 15, 2012

Abstract

This note is based on a recent confidence index introduced in the context of compensating probability factors for deviations of subjective probability measures from equivalent martingale measures. The index is adjusted for loss gain probability spreads, and it explains momentum in confidence. We use the index to introduce a confidence matrix operator which shows how a subject transforms gain domain into fear of loss. So she is loss averse or risk averse. By contrast, the adjoint confidence matrix operator is an Euclidean motion which rotates and reverses loss domain into hope of gain. Thus, signifying risk seeking over loss domains in hope of gain. Simulation of the model shows that the distribution of prior loss [gain] probabilities is a predictor of confidence momentum and fields of confidence. Moreover, our field theory of confidence mimics a sample of Gallup Monthly Economic Confidence Index, and depicts a term structure of confidence for hope and fear. It plainly shows that the growth rate of Gallup Economic Confidence Index -- which is highly correlated with popular confidence indexes like UBS/Gallup Investor Optimism Index; Michigan Consumer Confidence Index; and Yale Investor Confidence Index -- predict bubbles and crashes.

Keywords: confidence, term structure, random field, hope and fear, probability weighting function, momentum

JEL Classification: C02, C16, C43, C44, D03, D81, G01, G10

Suggested Citation

Charles-Cadogan, G., A Note on Confidence Momentum and Term Structure of Confidence with Applications to Financial Markets (April 15, 2012). Available at SSRN: https://ssrn.com/abstract=2003319 or http://dx.doi.org/10.2139/ssrn.2003319

G. Charles-Cadogan (Contact Author)

Ryerson University - Ted Rogers School of Management, Institute for Innovation and Technology Management ( email )

575 Bay
Toronto, Ontario M5G 2C5
Canada

UCT - School of Economics ( email )

Rondebosch, 7701
South Africa

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