The Sum of All Positive (Expectations) and Negative (Fears) Investor Sentiment and Stock Market Returns

Abstract

This paper aims to measure the positive (Expectations) and negative (Fears) investor sentiment about the ongoing economic conditions and analyze both sentiments for changes in stock market returns. Following the method proposed by Da et al. (2014), this study estimates the investor’s economic sentiment by using the Google SVI of search terms about macroeconomic indicators. The study decomposes investor sentiment into positive economic sentiment “Expectations” and negative economic sentiment “Fears”. The study regresses both sentiments for changes in stock market returns using time-series regression models. The results of the study show that both Expectations and Fears explain the contemporaneous changes in stock market returns. Investor Expectations show a positive impact on a contemporaneous change in stock market returns, whereas Fears depict a negative impact on stock returns. The study contributes to the financial literature in two ways. First, the study provides an alternative measure for investors’ expectations and investors’ fears. Second, the study provides empirical evidence on the net effect of investors’ expectations and fears on stock returns.