Investor Sentiment Measures

50 Pages Posted: 14 Sep 2004

See all articles by Lily Xiaoli Qiu

Lily Xiaoli Qiu

Brown University - Department of Economics

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 28, 2006


Our paper examines two potential proxies for investor sentiment - the closed end fund discount (CEFD) and consumer confidence (CC). We can validate these proxies against a recently available more direct proxy for investor sentiment from UBS/Gallup. We find that the CEFD has no correlation with the UBS/Gallup survey, while the consumer confidence index does. The latter correlation would likely not be observed if either the consumer confidence index or the UBS/Gallup survey were not measures of some form of generic sentiment.

This direct validation is not dependent on a price role for sentiment in financial markets. Going further, our paper finds that only consumer confidence but not the closed-end fund discount plays a robust role in financial market pricing. Changes in consumer confidence can explain the excess returns on small decile stocks. The pathway does not seem to operate only through the real underlying economy (consumption and corporate profits), and it is unaffected by controlling for a measure of CEO confidence changes. Our evidence satisfies a necessary condition for a behavioral perspective (DeLong/Shleifer/Summers/Waldmann 1990), but it is not a sufficient condition. Absent quantitative predictions by either the behavioral or the classical perspective about the exact influence of sentiment/confidence, empirical evidence cannot reject either.

Keywords: investor sentiment, consumer confidence

JEL Classification: G14, G12

Suggested Citation

Qiu, Lily Xiaoli and Welch, Ivo, Investor Sentiment Measures (July 28, 2006). Available at SSRN: or

Lily Xiaoli Qiu (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Ivo Welch

University of California, Los Angeles (UCLA) ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2508 (Phone)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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