Abstract
Previous studies in the field of behavioral finance suggest that investors’ irrational behavior induces the difference between stock price and fundamental value. Uninformed investors with cognitive biases tend to make irrational investment decisions, such as herding, overconfidence, and loss aversion, rather than rational investment decisions. To find that mispricing is caused by investors’ irrational behavior, many studies focus on suggesting investor sentiment indicators constructed using surveys, transaction data, and textual data. We systematically review the literature regarding investor sentiment indices depending on the type of data and discuss the limitations of each index. Based on such limitations, we suggest ways to improve the measurement of each sentiment indicator.
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