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Measuring investor sentiment in the stock market

Author

Listed:
  • Francisca Beer

    (California State University of San Bernardino)

  • Mohamed Zouaoui

    (Université de Franche-Comté - LEG/FARGO UMR Cnrs 5118)

Abstract

Recently, the investor sentiment measure has become one of the most widely studied areas in behavioral finance. Various measures have been developed in the literature without being to determine which measure should be used. The purpose of this study is to test their relative performance in predicting stock returns. Using a panel of investor sentiment measures, we develop a new measure of sentiment which combines direct and indirect sentiment measures. Our results show that our composite sentiment index affects the returns of stocks hard to value and difficult to arbitrage consistent with the predictions of noise trader’s models. Finally, we find that our composite index has a better predictive ability than the alternative sentiment measures largely used in the literature.

Suggested Citation

  • Francisca Beer & Mohamed Zouaoui, 2011. "Measuring investor sentiment in the stock market," Working Papers CREGO 1110901, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    • Handle: RePEc:dij:wpfarg:1110901
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    More about this item

    Keywords

    sentiment measures; composite index; stock returns.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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