The index, developed by Harvard Professor Ken Froot and State Street Associates Director Paul O’Connell, is based on financial theory that assigns precise meaning to changes in investor risk sentiment, or the willingness of investors to hold proportionally more or less of their portfolio in higher-risk investments, a press release said. The more of their portfolios that institutional investors are willing to devote to more volatile investments over less volatile investments, the greater their appetite for risk and the greater their confidence.
“Just as consumer confidence surveys aim to determine whether consumers are willing to spend money, our index sheds light on whether or not institutional investors are bullish enough to take on higher risk investments given economic fundamentals and market conditions,” O’Connell said in a statement.
The monthly index data for September shows investor confidence fell marginally from August, but remains strong compared with the first six months of 2003. In September, the index fell 0.2 points to 103.4 from 103.6 in August, and is still well above the 96.4 average in the first half of the year.
Because the index is a quantitative measure of the investment behavior of thousands of institutional investors, it is not directly tied to good or bad news, or to the price of stocks, bonds or other assets so it can more easily help measure investor sentiment, according to a press release.
State Street Associates is a subsidiary of State Street Corporation.