Measure Of Investor Sentiment Research Articles

Islamic occasions and investor sentiment

PurposeThe purpose of this paper is to investigate whether the Islamic religious occasions can, through their impact on investor sentiment, affect returns in six Arab financial markets.Design/methodology/approachIn this paper, the authors test the effect of the occasions of Hajj pilgrimage, Ramadan, Eid-al-Fitr, Mawlid and Ashura during the period of 2001-2016 on Saudi Arabia, Dubai, Kuwait, Egypt, Qatar and Bahrain financial markets. Three measures of investor sentiment are used: trading volume, high minus low and psychological line index.FindingsHigher effect of investor sentiment on returns is detected after Hajj pilgrimage than that before Hajj pilgrimage in all studied financial markets. The positive emotions during Ramadan contribute significantly to the increase in returns in Arab financial markets. Results indicate that most of studied financial markets exhibit a significant effect of investor sentiment on returns during the first 10 days and the second 10 days of Ramadan. Empirical results indicate that Eid-al-Fitr affects the relation between investor sentiment and returns in Saudi Arabia, Kuwait, Qatar and Dubai financial markets. Relationship between investor sentiment and returns is not is not significantly affected by the Mawlid occasion, except in the Dubai and Kuwait financial markets.Originality/valueThe Islamic occasions of the Hajj pilgrimage, Ramadan and Eid-al-Fitr affect significantly the relation between investor sentiment and returns.

Is there an Olympic gold medal rush in the stock market?

ABSTRACTInvestor sentiment and attention are often linked to the same non-economic events making it difficult to understand why and how asset prices are affected. We disentangle these two potential drivers of investment behaviour by analysing a new data-set of medals for the major participating countries and sponsor firms over four Summer Olympic Games. Our results show that trading volume and volatility are substantially reduced following Olympic success although returns appear to be largely unaffected. Analysis of data from online search volumes and surveys measuring investor sentiment also suggests that the market impact of the Olympics is linked to changes in attention.

Market Reaction to Macroeconomic News: The Role of Investor Sentiment

AbstractThis paper demonstrates that risk is unlikely to be the only factor explaining the excess return difference between macroeconomic announcement days and other trading days. We argue that investor sentiment may affect the return on the prescheduled macroeconomic news release. We find that the return on macroeconomic announcement days is much higher than the return on other days, especially when changes in investor sentiment are higher. The impact of investor sentiment on the macroeconomic announcement effect is greater when investor sentiment is higher. Our results remain valid using different investor sentiment measures and testing for heteroscedasticity in stock returns.

Measuring Investor Sentiment

Investor sentiment indicates how far an asset value deviates from its economic fundamentals. In this paper, we review various measures of investor sentiment based on market, survey, and text and media data, respectively. There is ample evidence that sentiment can explain returns on stocks that are difficult to value and costly to arbitrage, such as unprofitable stocks, non-dividend-paying stocks, extreme growth stocks, and distressed stocks. However, much remains to be done. We discuss three issues for future research: to aggregate measures over various sources and various time horizons, to link investor sentiment to technical analysis, and to model statistically the evolution of investor sentiment.

Investor sentiment and US presidential elections

PurposeThe purpose of this paper is to examine the shifts in investor sentiment around the last seven US presidential elections (1988 through 2012).Design/methodology/approachInvestor sentiment is measured by changes in closed-end funds discounts, and the results are corroborated with three robustness tests, including an alternate measure of investor sentiment obtained from the survey conducted by the American Association of Individual Investors.FindingsClosed­end funds discounts are significantly diminished from two weeks before a US presidential election to a week before the election, and persist until the week after the election, suggesting an increase in investors’ optimism during that period, particularly when a Democrat is elected president. More than the particular party prevailing, however, investors appear to be more interested in avoiding the entrenchment of power since the results suggest that they become optimistic when a change in the ruling party takes place, but become pessimistic when there is power continuity in the White House. The increase in investor optimism that is observed around the time of US presidential elections is not replicated during non-election years, which seems to corroborate that the elections are indeed driving the results.Originality/valueThis paper is the first to formally examine the relation between investor sentiment and US presidential elections using closed-end funds discounts as the measure for sentiment.

A Principal Component Approach to Measuring Investor Sentiment in Hong Kong

In light of the increasing integration between China and Hong Kong, this paper develops a new market sentiment index for the Hong Kong stock market by including the CSI 300 index of the Chinese equity market. A threshold regression model using the sentiment index as a threshold variable is estimated to capture the state of the Hong Kong stock market.

The Impact of Investor Sentiment on KOSPI Futures Returns

본 연구는 2012년 1월부터 2016년 12월기간의 10분 단위 내재변동성지수(VKOSPI), 선물거래 주체별 거래량, 풋/콜 거래량비율 등의 단기 투자심리지표와 현물수익률이 선물수익률에 미치는 영향을 분석한다. 내재변동성지수의 상승은 주가를 하락시키며, 이 지수는 주가 상승기 보다 하락기에 더 큰 충격을 미친다. 선물거래 주체는 외국인, 기관, 개인투자자로 분류되며, 이들 투자자들의 거래량은 초단기 선물수익률에 서로 다른 영향을 미칠 것이다. 또한 콜 거래량 대비 풋거래량의 증가는 현․선물 가격의 하락을 초래하는 변수로 보고되고 있다. 본 연구의 실증결과는 다음으로 요약된다. 첫째, KOSPI200 현물수익률이 KOSPI200 선물지수 단기 수익률을 결정하는 가장 중요한 요인으로 파악되었다. 둘째, 현물수익률의 영향을 제거한 후의 초단기 선물수익률은 VKOSPI가 상승할수록 낮아짐을 관측함으로써 VKOSPI의 증가가 선물지수 단기적인 하락을 초래하는 공포지수임이 확인되었다. 셋째, 투자주체별 거래량의 관점에서는 외국인(개인) 투자자의 거래량의 증가는 선물수익률의 상승(하락)을, 외국인(개인) 순매수 거래량의 감소는 선물 수익률의 하락(상승)으로 이어짐으로써 개인 투자자의 투자심리는 시장의 가격추이와 역행하는 현상이 발견되었다. 넷째, 풋/콜 순매수 거래량의 증가(감소)는 현물수익률의 영향을 제거한 후의 초단기 선물수익률의 하락(상승)을 초래하는 것으로 나타났다.This study investigates impacts of investor sentiment on KOSPI200 nearby futures returns using the 10 minutes data from January 2012 to December 2016. The relationship between index futures returns and changes in cash returns and change in investor sentiment measures are examined and following results are found. The regression coefficient of KOSPI cash return is estimated as 0.9027 and its explanatory power is 74.5%. Thus KOSPI cash return is found to be the dominant variable for the variation of its futures returns. In addition, investor sentiment variables like VKOSPI, foreigners’ futures long position, individual traders’ long position, and put/call volume ratio reveal marginally significant explanatory power. VKOSPI shows very significant impact on intraday futures returns unexplained by the cash market return. Also, trading behavior of futures market participants show strong effects on unexplained futures returns. The ratio of ATM put/call trading volume provides significant information regarding unexplained futures returns. According to test results, futures prices affected not only by the cash market prices but also by investor sentiment. Thus it is confirmed that investor sentiment plays an important role in explaining futures returns unexplained by the cash market return.

Does investor sentiment affect price-earnings ratios?

PurposeA large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern that stock valuation is also driven by investor sentiment. This paper aims to extend the existing literature by exploring whether investor sentiment impacts the P/E ratio.Design/methodology/approachThe paper examines the determinants of P/E ratio by applying latent variable models with investor sentiment as a latent variable and several fundamental factors as control variables. Investor sentiment is proxied by trading volume, advance-decline ratio and price volatility.FindingsUsing annual data of the US industries over the period of 1998-2014, the current paper produces new empirical evidence that investor sentiment significantly affects the P/E ratio. This result is robust to the inclusion of several control variables that have been documented to explain the P/E ratio.Practical implicationsThe findings have important implications for investors, as downplaying sentiment can lead to significant errors in making equity investment choices based on the P/E ratio.Originality/valueThe analytical framework of the current paper is differentiated from the conventional analysis in which the P/E ratio is regressed against control variables and proxies for sentiment, thus falling into the trap of implicitly presupposing that proxies are perfect measures of investor sentiment. As all proxies may have measurement errors to the true but unobservable investor sentiment, the current paper uses latent variable models to shed new light on the influence of investor sentiment on the P/E ratio.

Market sentiment dispersion and its effects on stock return and volatility

Behavioral economics has revealed that investor sentiment can profoundly affect individual behavior and decision-making. Recently, the question is no longer whether investor sentiment affects stock market valuation, but how to directly measure investor sentiment and quantify its effects. Before the era of big data, research uses proxies as a mediator to indirectly measure investor sentiment, which has proved elusive due to insufficient data points. In addition, most of extant sentiment analysis studies focus on institutional investors instead of individual investors. This is despite the fact that United States individual investors have been holding around 50% of the stock market in direct stock investments. In order to overcome difficulties in measuring sentiment and endorse the importance of individual investors, we examine the role of individual sentiment dispersion in stock market. In particular, we investigate whether sentiment dispersion contains information about future stock returns and realized volatility. Leveraging on development of big data and recent advances in data and text mining techniques, we capture 1,170,414 data points from Twitter and used a text mining method to extract sentiment and applied both linear regression and Support Vector Regression; found that individual sentiment dispersion contains information about stock realized volatility, and can be used to increase the prediction accuracy. We expect our results contribute to extant theories of electronic market financial behavior by directly measuring the individual sentiment dispersion; raising a new perspective to assess the impact of investor opinion on stock market; and recommending a supplementary investing approach using user-generated content.

INDIVIDUAL MEAN-VARIANCE RELATION AND STOCK-LEVEL INVESTOR SENTIMENT

This research studies the effect of stock-level investor sentiment on individual stock returns’ mean-variance relation. Using unique buy and sell volume data of retail investors in Korean stock market, we find that a positive mean-variance relation is undermined among high-sentiment stocks, but holds among low-sentiment stocks. We adopt buy-sell imbalances of retail investors for individual stocks as a measure of stock-level investor sentiment. Further, our findings provide empirical evidence of a strong riskreturn trade-off among stocks with low retail concentration (e.g., large capitalization, high-priced, and growth stocks). Existing research only analyzes market-wide investor sentiment. However, we study the effect of stock-level investor sentiment on individual stock returns. Therefore, our findings suggest novel implications about the investment strategy that the stock-level investor sentiment is important when constructing portfolios based on variance.

The mispricing of equity risk: behavioral and corporate leverage factors

In this paper, we investigate the risk anomaly in equity market. Our focus is to assess the relationship between skewness preference, investor sentiment, corporate leverage and the mispricing of equity risk. Based on data of all the firms of the CAC All Tradable index over the period 2005 and 2015, we find that investor preference for skewed stocks and investor sentiment are strong predictors of stock returns. In particular, they are positively related to both market and total risks. This result supplies evidence that investor irrationality maters in stocks’ valuation. In addition, we find that that leverage is inversely related to equity risk and explains why French stocks are undervaluated. Our results are robust to the usage of different measures of total investor sentiment and corporate leverage.

On the construction of Chinese stock market investor sentiment index

Measuring investor sentiment has become one of the most widely examined areas in behavioral finance. For the purpose of measuring investor sentiment more accurately, we classify the investor sentim...

A PLS Approach to Measuring Investor Sentiment in Chinese Stock Market

We select five objective sentiment indicators and one subjective sentiment indicator to build investor sentiment composite index in Chinese stock market by using the partial least squares. The reason why we do that is to improve the shortcomings of the principal component analysis, which was adopted to build investor sentiment composite index in the pioneering research. Moreover, due to the large proportion of individual investors in Chinese stock market and the rapid change of investor sentiment, we innovatively use the weekly data with smaller information granularity and higher frequency. Through empirical tests for its reasonability and market’s predictive capability, we find that this index appears to fit the data better and improves prediction.

Investor Sentiment and Return Predictability of the Option to Stock Volume Ratio

We study the effect of investor sentiment on the relation between the option to stock volume ratio (O/S) and future stock returns. Relative option volume has return predictability under short sale constraints. For this reason, we expect and find a stronger O/S‐return relation during high sentiment periods than during low sentiment periods. We find that Baker and Wurgler's Investor Sentiment Index affects the O/S‐return relation after controlling for consumer sentiment indices and economic environment factors. While prior studies have used consumer sentiment indices as alternative measures of investor sentiment, our results suggest these effects are distinct.

What Drives Aggregate Investment: Investor Sentiment or Time-Varying Equity Premium?

In Cochrane’s (1991) investment-based asset pricing model, aggregate investment is driven by conditional equity premium; Arif and Lee (2014), however, find that it is primarily influenced by investor sentiment or gauges of irrational exuberance. We reconcile these conflicting views by showing that the positive relation between aggregate investment and investor sentiment documented by Arif and Lee (2014) reflects the fact that both variables move closely with conditional equity premium. Our results cast doubt to (1) the conjecture that stock market mispricing is an important driver of aggregate investment and (2) the conventional wisdom that investor sentiment measures irrationality.

Stock market sentiment lexicon acquisition using microblogging data and statistical measures

Lexicon acquisition is a key issue for sentiment analysis. This paper presents a novel and fast approach for creating stock market lexicons. The approach is based on statistical measures applied over a vast set of labeled messages from StockTwits, which is a specialized stock market microblog. We compare three adaptations of statistical measures, such as Pointwise Mutual Information (PMI), two new complementary statistics and the use of sentiment scores for affirmative and negated contexts. Using StockTwits, we show that the new lexicons are competitive for measuring investor sentiment when compared with six popular lexicons. We also applied a lexicon to easily produce Twitter investor sentiment indicators and analyzed their correlation with survey sentiment indexes. The new microblogging indicators have a moderate correlation with popular Investors Intelligence (II) and American Association of Individual Investors (AAII) indicators. Thus, the new microblogging approach can be used alternatively to traditional survey indicators with advantages (e.g., cheaper creation, higher frequencies).

Quality of Private Signals and Expectations About Returns

This paper introduces a new measure of investor sentiment that is constructed using the information shared by traders on Twitter. The main advantage of the proposed index over existing measures of sentiment is the possibility of using the number of followers as a proxy for the quality of private signals. Moreover, the data allows for gauging sentiment directly with high frequency data. The index is used to test the implications of theories in asset pricing. The results show that (1) the follower-weighted sentiment index predicts the same day return of the stock market index, but the equal-weighted index has no predictive power for daily returns, (2) dispersion of expectations about future returns predicts volatility of the stock market returns, (3) information asymmetry is positively related to return volatility, and (4) the density of information arrival measured by the number of opinionated tweets is positively correlated with volatility and trading volume of the stock market index.

Investor sentiment, limits on arbitrage, and the performance of cross-country stock market anomalies

The behavioral finance view of anomalies suggests that mispricing stems from investor irrationality that could not easily be arbitraged away. We test the implications of this concept at the country level. This study examines whether market-wide measures of investor sentiment and arbitrage constraints affect the performance of cross-country stock market anomalies. Thus, we first categorize and replicate at the country level a set of 50 parallels of stock-level anomalies documented in the academic literature. Having determined 15 of them to be reliable and robust sources of return, we investigate their relationship to the limits on arbitrage and market-wide sentiment. We observe that variation in market sentiment plays an important role in returns on cross-country value strategies, whereas tight arbitrage conditions negatively influence momentum profits.

Closed-End Funds

Recent work suggests that investor sentiment drives the behavior of closed-end fund premiums. We develop a microstructure model that links the observed closed-end fund premiums to the interplay between the bid-ask spread of the fund with that of the fund's holdings. Employing a battery of investor sentiment measures, we find inconsistent evidence in support of an investor sentiment hypothesis, but robust support for the liquidity based explanation in explaining the closed-end fund premium. The importance of the microstructure explanation extends to pricing of the closed-end funds whereby significant cross-sectional pricing ability for the bid-ask spreads is found, but no significant pricing ability for either investor sentiment or closed-end fund premiums.

Home and foreign investor sentiment and the stock returns

Abstract We investigate the impact of home and foreign investor sentiment on stock returns. We use the total investor sentiment index of Baker and Wurgler (2006) and consider the closed-end funds discount as a measure of foreign investor sentiment. Based on data of all the firms of the CAC All Tradable index over the period 2003 and 2013, we find that foreign and home sentiment are strong contrarian predictors of stock returns. This result supplies evidence that equity home bias is an important component of investor sentiment. In addition, we find that only favorable sentiment matters in French stocks’ valuation. Our results are robust to the using of different measures of total investor sentiment.