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Sentiment indices on financial markets: What do they measure?

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  • Bormann, Sven-Kristjan
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    Abstract

    Sentiment indices based on investor sentiment surveys attempt to measure the stock market sentiment. The literature on these indices focusses mainly on whether investor sentiment influences the financial markets or not. But the term 'sentiment' has never been defined in the literature. Therefore it is unclear what is measured by sentiment indices, whether it is really sentiment or something different. This paper closes this gap in the literature by using psychological definitions about feelings to explain what might be meant by 'market sentiment'. It shows how useful these definitions are with data from the German sentiment index 'Sentix'. The paper contributes to the current discussion in three ways: 1. It presents a simple concept of sentiments in general. 2. It relates short and long term sentiment indices to two distinct parts of sentiments, emotion and mood. 3. It extracts two factors representing investor emotion and mood across all markets in the dataset. These results are stable across markets and model specifications in the Sentix dataset. --

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2013-58.

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    Date of creation: 2013
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    Handle: RePEc:zbw:ifwedp:201358

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    Keywords: sentiment indices; investor sentiment; factor analysis; psychological analysis; financial markets;

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    1. Neal, Robert & Wheatley, Simon M., 1998. "Do Measures of Investor Sentiment Predict Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(04), pages 523-547, December.
    2. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Hannover Economic Papers (HEP) dp-337, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
    4. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    5. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    6. Benjamin Enke & Florian Zimmermann, 2013. "Correlation Neglect in Belief Formation," CESifo Working Paper Series 4483, CESifo Group Munich.
    7. R. Scott Hacker & Abdulnasser Hatemi-J, 2006. "Tests for causality between integrated variables using asymptotic and bootstrap distributions: theory and application," Applied Economics, Taylor & Francis Journals, vol. 38(13), pages 1489-1500.
    8. Finter, Philipp & Niessen-Ruenzi, Alexandra & Ruenzi, Stefan, 2010. "The impact of investor sentiment on the German stock market," CFR Working Papers 10-03, University of Cologne, Centre for Financial Research (CFR).
    9. Tuckett, David, 2009. "Addressing the psychology of financial markets," Economics Discussion Papers 2009-37, Kiel Institute for the World Economy.
    10. Brown, Gregory W. & Cliff, Michael T., 2004. "Investor sentiment and the near-term stock market," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 1-27, January.
    11. Thomas Lux, 2011. "Sentiment dynamics and stock returns: the case of the German stock market," Empirical Economics, Springer, vol. 41(3), pages 663-679, December.
    12. Tuckett, David, 2009. "Addressing the psychology of financial markets," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(40), pages 1-22.
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