IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v100y2025ics1059056025002680.html

Relative investor sentiment

Author

Listed:
  • Gao, Xiang
  • Koedijk, Kees
  • Walther, Thomas
  • Wang, Zhan

Abstract

We propose a new investor sentiment index by estimating the differences between moments from realized stock returns and option-implied moments. Validating the Relative Investor Sentiment index, we show that the index is correlated with other proxies, exhibits known patterns of stock market reactions to sentiment shocks, is stronger for hard-to-arbitrage assets, and is complementary to alternative sentiment measures on a monthly and daily horizon. Using our monthly index, we show that momentum strategies perform significantly better during high sentiment periods and even worse in low sentiment periods.

Suggested Citation

  • Gao, Xiang & Koedijk, Kees & Walther, Thomas & Wang, Zhan, 2025. "Relative investor sentiment," International Review of Economics & Finance, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:reveco:v:100:y:2025:i:c:s1059056025002680
    DOI: 10.1016/j.iref.2025.104105
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056025002680
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2025.104105?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Antoniou, Constantinos & Doukas, John A. & Subrahmanyam, Avanidhar, 2013. "Cognitive Dissonance, Sentiment, and Momentum," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(1), pages 245-275, February.
    2. Guofu Zhou, 2018. "Measuring Investor Sentiment," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 239-259, November.
    3. Gao, Zhenyu & Ren, Haohan & Zhang, Bohui, 2020. "Googling Investor Sentiment around the World," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(2), pages 549-580, March.
    4. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    5. Zhi Da & Joseph Engelberg & Pengjie Gao, 2015. "Editor's Choice The Sum of All FEARS Investor Sentiment and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 1-32.
    6. Jennifer Conrad & Robert F. Dittmar & Eric Ghysels, 2013. "Ex Ante Skewness and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 68(1), pages 85-124, February.
    7. Bevilacqua, Mattia & Tunaru, Radu, 2021. "The SKEW index: Extracting what has been left," Journal of Financial Stability, Elsevier, vol. 53(C).
    8. Marcin Kacperczyk & Emiliano S Pagnotta, 2019. "Chasing Private Information," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4997-5047.
    9. 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.
    10. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    11. Chang, Chuang-Chang & Hsieh, Pei-Fang & Wang, Yaw-Huei, 2015. "Sophistication, Sentiment, and Misreaction," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(4), pages 903-928, August.
    12. repec:bla:jfinan:v:59:y:2004:i:3:p:1235-1258 is not listed on IDEAS
    13. repec:bla:jfinan:v:59:y:2004:i:3:p:1345-1365 is not listed on IDEAS
    14. Lily Qiu & Ivo Welch, 2004. "Investor Sentiment Measures," NBER Working Papers 10794, National Bureau of Economic Research, Inc.
    15. Roman Kozhan & Anthony Neuberger & Paul Schneider, 2013. "The Skew Risk Premium in the Equity Index Market," The Review of Financial Studies, Society for Financial Studies, vol. 26(9), pages 2174-2203.
    16. Bevilacqua, Mattia & Tunaru, Radu, 2021. "The SKEW index: extracting what has been left," LSE Research Online Documents on Economics 108198, London School of Economics and Political Science, LSE Library.
    17. repec:bla:jfinan:v:59:y:2004:i:2:p:711-753 is not listed on IDEAS
    18. Mark J. Kamstra & Lisa A. Kramer & Maurice D. Levi, 2003. "Winter Blues: A SAD Stock Market Cycle," American Economic Review, American Economic Association, vol. 93(1), pages 324-343, March.
    19. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    20. repec:bla:jfinan:v:44:y:1989:i:4:p:1011-23 is not listed on IDEAS
    21. Alex Edmans & Diego García & Øyvind Norli, 2007. "Sports Sentiment and Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1967-1998, August.
    22. David Weinbaum & Andrew Fodor & Dmitriy Muravyev & Martijn Cremers, 2023. "Option Trading Activity, News Releases, and Stock Return Predictability," Management Science, INFORMS, vol. 69(8), pages 4810-4827, August.
    23. Chordia, Tarun & Lin, Tse-Chun & Xiang, Vincent, 2021. "Risk-Neutral Skewness, Informed Trading, and the Cross Section of Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(5), pages 1713-1737, August.
    24. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    25. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    26. Bruno Feunou & Mohammad R Jahan-Parvar & Cédric Okou, 2018. "Downside Variance Risk Premium," Journal of Financial Econometrics, Oxford University Press, vol. 16(3), pages 341-383.
    27. Diavatopoulos, Dean & Doran, James S. & Fodor, Andy & Peterson, David R., 2012. "The information content of implied skewness and kurtosis changes prior to earnings announcements for stock and option returns," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 786-802.
    28. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    29. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
    30. Lieven Baele & Joost Driessen & Sebastian Ebert & Juan M Londono & Oliver G Spalt, 2019. "Cumulative Prospect Theory, Option Returns, and the Variance Premium," The Review of Financial Studies, Society for Financial Studies, vol. 32(9), pages 3667-3723.
    31. Kostopoulos, Dimitrios & Meyer, Steffen, 2018. "Disentangling investor sentiment: Mood and household attitudes towards the economy," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 28-78.
    32. Whitney Newey & Kenneth West, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    33. Lykourgos Alexiou & Leonidas S. Rompolis, 2022. "Option‐implied moments and the cross‐section of stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 668-691, April.
    34. Wen Jin & Joshua Livnat & Yuan Zhang, 2012. "Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 50(2), pages 401-432, May.
    35. Lars A. Lochstoer & Tyler Muir, 2022. "Volatility Expectations and Returns," Journal of Finance, American Finance Association, vol. 77(2), pages 1055-1096, April.
    36. Michael Lemmon & Sophie Xiaoyan Ni, 2014. "Differences in Trading and Pricing Between Stock and Index Options," Management Science, INFORMS, vol. 60(8), pages 1985-2001, August.
    37. Michelle Lowry & Marco Rossi & Zhongyan Zhu, 2019. "Informed Trading by Advisor Banks: Evidence from Options Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 605-645.
    38. Obaid, Khaled & Pukthuanthong, Kuntara, 2022. "A picture is worth a thousand words: Measuring investor sentiment by combining machine learning and photos from news," Journal of Financial Economics, Elsevier, vol. 144(1), pages 273-297.
    39. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    40. Chen, Yangyang & Goyal, Abhinav & Veeraraghavan, Madhu & Zolotoy, Leon, 2020. "Terrorist attacks, investor sentiment, and the pricing of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    41. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.
    42. Edmans, Alex & Fernandez-Perez, Adrian & Garel, Alexandre & Indriawan, Ivan, 2022. "Music sentiment and stock returns around the world," Journal of Financial Economics, Elsevier, vol. 145(2), pages 234-254.
    43. Chen, Zhuo & Lu, Andrea, 2017. "Slow diffusion of information and price momentum in stocks: Evidence from options markets," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 98-108.
    44. Bing Han, 2008. "Investor Sentiment and Option Prices," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 387-414, January.
    45. Kostopoulos, Dimitrios & Meyer, Steffen & Uhr, Charline, 2020. "Google search volume and individual investor trading," Journal of Financial Markets, Elsevier, vol. 49(C).
    46. Collin-Dufresne, Pierre & Fos, Vyacheslav & Muravyev, Dmitry, 2021. "Informed Trading in the Stock Market and Option-Price Discovery," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 1945-1984, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hadhri, Sinda & Younus, Mehak & Naeem, Muhammad Abubakr & Yarovaya, Larisa, 2025. "Listening to the Market: Music sentiment and cryptocurrency returns," Journal of International Money and Finance, Elsevier, vol. 157(C).
    2. Liu, Funing & Zhang, Xiaolin, 2025. "Multi-media textual information, COVID-19 sentiment and bond spread," Research in International Business and Finance, Elsevier, vol. 74(C).
    3. Szymon Lis, 2024. "Investor Sentiment in Asset Pricing Models: A Review of Empirical Evidence," Papers 2411.13180, arXiv.org.
    4. Szymon Lis, 2022. "Investor Sentiment in Asset Pricing Models: A Review," Working Papers 2022-14, Faculty of Economic Sciences, University of Warsaw.
    5. Zaremba, Adam & Szyszka, Adam & Long, Huaigang & Zawadka, Dariusz, 2020. "Business sentiment and the cross-section of global equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    6. Ni Yang & Adrian Fernandez‐Perez & Ivan Indriawan, 2025. "The price impact of tweets: A high‐frequency study," The Financial Review, Eastern Finance Association, vol. 60(1), pages 147-171, February.
    7. Seo, Sung Won & Kim, Jun Sik, 2015. "The information content of option-implied information for volatility forecasting with investor sentiment," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 106-120.
    8. Wenjie Ding & Khelifa Mazouz & Qingwei Wang, 2019. "Investor sentiment and the cross-section of stock returns: new theory and evidence," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 493-525, August.
    9. Edmans, Alex & Fernandez-Perez, Adrian & Garel, Alexandre & Indriawan, Ivan, 2022. "Music sentiment and stock returns around the world," Journal of Financial Economics, Elsevier, vol. 145(2), pages 234-254.
    10. Huynh, Nhan & De Mello, Lurion & Li, Kai, 2025. "Evolution of investor sentiment: A systematic literature review and bibliometric analysis," International Review of Economics & Finance, Elsevier, vol. 100(C).
    11. Kim, Byungoh & Suh, Sangwon, 2018. "Sentiment-based momentum strategy," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 52-68.
    12. Hannah Lea Hühn & Hendrik Scholz, 2018. "Alpha Momentum and Price Momentum," IJFS, MDPI, vol. 6(2), pages 1-28, May.
    13. Obaid, Khaled & Pukthuanthong, Kuntara, 2022. "A picture is worth a thousand words: Measuring investor sentiment by combining machine learning and photos from news," Journal of Financial Economics, Elsevier, vol. 144(1), pages 273-297.
    14. Abudy, Menachem (Meni) & Mugerman, Yevgeny & Shust, Efrat, 2022. "The Winner Takes It All: Investor Sentiment and the Eurovision Song Contest," Journal of Banking & Finance, Elsevier, vol. 137(C).
    15. Sun, Licheng & Najand, Mohammad & Shen, Jiancheng, 2016. "Stock return predictability and investor sentiment: A high-frequency perspective," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 147-164.
    16. Liu, Qing & Wang, Shouyang & Sui, Cong, 2023. "Risk appetite and option prices: Evidence from the Chinese SSE50 options market," International Review of Financial Analysis, Elsevier, vol. 86(C).
    17. Kim Kaivanto & Peng Zhang, 2019. "Investor Sentiment as a Predictor of Market Returns," Working Papers 268005798, Lancaster University Management School, Economics Department.
    18. Shi, Huai-Long & Chen, Huayi, 2025. "Understanding the role of sentiment beta in China," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    19. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    20. Hadhri, Sinda, 2023. "Do cryptocurrencies feel the music?," International Review of Financial Analysis, Elsevier, vol. 89(C).

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:100:y:2025:i:c:s1059056025002680. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.