Aggregate investor confidence, price momentum and asset pricing

Abstract

ABSTRACT This article applies a new measure of aggregate investor confidence to explain the well-established factors driving stock returns in the asset pricing literature and on momentum returns. The aggregate measure extracts feedback impulses from stock market data that affect aggregate investor confidence. We find that aggregate investor confidence is positively associated with the profitability of momentum strategies and Fama–French’s small minus big (SMB) factor, providing empirical evidence in line with prominent behavioural models. Using a sample of data for the United States from 1927 to 2019, aggregate investor confidence requires around 3 months to notably affect momentum returns and remains statisticallct 3y significant for up to 16 months. Additionally, investors trade more and tilt their preference towards small market capitalization and growth stocks when confidence is high.