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Investor Sentiment and Its Mechanisms in Financial Markets: A Comprehensive Review

Author

Listed:
  • Guo, Zhenqi
  • Luo, Yingqi
  • Wei, Qianwen
  • Huang, Yiling
  • Luo, Kaiyu
  • Lu, Rongzhen
  • Ke, Qiyan
  • Peng, Nianjiao

Abstract

Investor sentiment significantly shapes stock market behavior, influencing asset prices, trading activity, market risk, and portfolio allocation. This review synthesizes conceptual frameworks, empirical evidence, and mechanisms through which sentiment affects financial markets, covering both developed and emerging markets. Direct and indirect sentiment measures, including surveys, market-based indicators, and text-based analyses, are evaluated. Findings underscore that optimism and pessimism drive overreaction, herding, and volatility, while also affecting asset allocation decisions. The review discusses practical implications for investors, regulators, and researchers, and identifies future research directions, including multi-modal sentiment analysis and theinteractions among behavioral biases.

Suggested Citation

  • Guo, Zhenqi & Luo, Yingqi & Wei, Qianwen & Huang, Yiling & Luo, Kaiyu & Lu, Rongzhen & Ke, Qiyan & Peng, Nianjiao, 2025. "Investor Sentiment and Its Mechanisms in Financial Markets: A Comprehensive Review," European Journal of Business, Economics & Management, Pinnacle Academic Press, vol. 1(5), pages 35-44.
    • Handle: RePEc:dba:ejbema:v:1:y:2025:i:5:p:35-44
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