Over the past two decades, respondents to the Shiller Investor Confidence Surveys assess the probability of a catastrophic stock market crash to be much higher that the historical frequency of such events. We decompose these crash probabilities into fundamental and subjective components and use a large language model to estimate the emotional content of respondent narratives. The subjective crash component is strongly associated with high negative affect. We use respondent location to test how news of unusual exogenous shocks affects crash belief formation. The results are consistent the risk-as-feelings hypothesis and suggest a path by which emotional response to news about salient events may play a role in the scale and variation in investor beliefs about rare disasters.
Authors
- Acknowledgements & Disclosure
- This paper incorporates and updates some results from our 2017 NBER working paper Crash beliefs from investor surveys (No. w22143) National Bureau of Economic Research. We thank the U.S. National Science Foundation, Whitebox Advisors, and the International Center for Finance at the Yale School of Management for support with the survey data. We thank Francesco Fabozzi for research support, particularly with the LLM. We thank Nathan Novemsky and Ravi Dhar for helpful discussions. We thank Leigh Ann Clark, Sumithra Sudhir and Minhua Wan for help with the data. The authors take responsibility for all errors. The opinions expressed are those of the authors and do not necessarily reflect those of the Office of Financial Research or the U.S. Department of the Treasury. Portions of the paper were commenced prior to affiliation with the Office of Financial Research. All errors are ours alone. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. William N. Goetzmann My external activities are disclosed on my website at: http://viking.som.yale.edu/outside%20activities%202015.pdf Funding for the survey is currently provided by the International Center for Finance at the Yale School of Management
- DOI
- https://doi.org/10.3386/w32589
- Published in
- United States of America
