Measuring Bubble Expectations and Investor Confidence

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Abstract
This paper presents evidence on attitude changes among investors in the US stock market. Two basic attitudes are explored: bubble expectations and investor confidence. Semiannual time-series indicators of these attitudes are presented for US stock market institutional investors based on questi onnaire survey results 1989-1998, from surveys that I have derived in collaboration with Fumiko Kon-Ya and Yoshiro Tsutsui. Five different time-series indicators whether there is among investors an expectation of a speculative bubble, an unstable situ ation with expectations for increase in the short run only, are produced. Four different time-series indicators whether there is an expectation of a negative speculative bubble are presented. Four different time-series indicators of investor confidence, that nothing can go wrong, are produced. Time-series variation for these indicators is significant, and cross correlations are gen- erally positive. A bubble expectations index, a negative-bubble expectations index, and an investor confidence index are derived from these indicators. Behavior of the indicators and indexes through time is examined, and the indexes are compared with other economic variables. A notable finding is a degree of high-frequency fluctuation, semester to semester, in the indexes.

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