Abstract
We analyze the effects of retail investor sentiment on the German stock market by introducing four distinct investor pessimism indices (IPIs) based on selected aggregate Google search queries of households. We assess the impact of weekly changes in sentiment captured by the IPIs on both contemporaneous and future DAX returns, volatility and trading volume. The indices are found to have individually varying but overall remarkably high explanatory power. If retail investor pessimism increases, contemporaneous market returns tend to decrease, accompanied by increases in volatility and trading volume. Moreover, future returns tend to increase while future volatility and trading volume decrease. However, the observed effects are only of transitory nature and vanish after at most two weeks. The outcome can be interpreted as correction effects. Overall, the results are well in line with modern investor sentiment theory.
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