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Investor sentiment: a retail trader activity approach

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  • Dave Berger

Abstract

Purpose - This study creates a measure of investor sentiment directly from retail trader activity to identify misvaluation and to examine the link between sentiment and subsequent returns. Design/methodology/approach - Using investor reports from a large discount brokerage that include measures of activity such as net buying, net new accounts and net new assets, this study creates a measure of retail trader sentiment using principal components. This study examines the relation between sentiment and returns through conditional mean and regression analyses. Findings - Retail sentiment activity coincides with aggregate Google Trends search data and firms with the greatest sensitivity to retail sentiment tend to be small, young and volatile. Periods of high retail sentiment precede poor subsequent market returns. Cross-sectional results detail the strongest impact on subsequent returns within difficult to value or difficult to arbitrage firms. Originality/value - This study links a rich measure of retail trader activity to subsequent market and cross-sectional returns. These results deepen our understanding of noise trader risk and aggregate investor sentiment.

Suggested Citation

  • Dave Berger, 2022. "Investor sentiment: a retail trader activity approach," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 21(2), pages 61-82, April.
    • Handle: RePEc:eme:rafpps:raf-06-2021-0152
    DOI: 10.1108/RAF-06-2021-0152
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    Cited by:

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    13. He, Jiao & Deng, Zhenghua, 2023. "Revisiting natural resources rents and sustainable financial development: Evaluating the role of mineral and forest for global data," Resources Policy, Elsevier, vol. 80(C).
    14. Teng, Yin-Pei, 2023. "Natural resources extraction and sustainable development: Linear and non-linear resources curse hypothesis perspective for high income countries," Resources Policy, Elsevier, vol. 83(C).
    15. Dai, Zhifeng & Luo, Zhuang & Liu, Chang, 2023. "Dynamic volatility spillovers and investment strategies between crude oil, new energy, and resource related sectors," Resources Policy, Elsevier, vol. 83(C).
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    More about this item

    Keywords

    Investor sentiment; Asset pricing; Return predictability; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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