Investor sentiments revisited: negligence of stock-level sentiments may be a mistake

Purpose - The primary objective of this research is to provide evidence that there are two distinct layers of investor sentiments that can affect asset valuation models. The first is general market-wide sentiments, while the second is biased approaches toward specific assets. Design/methodology/approach - To achieve the goal, the authors conducted a multi-step analysis of stock returns and constructed complex sentiment indices that reflect the optimism or pessimism of stock market participants. The authors used panel regression with fixed effects and a sample of the US stock market to improve the explanatory power of the three-factor models. Findings - The analysis showed that both market-level and stock-level sentiments have significant contributions, although they are not equal. The impact of stock-level sentiments is more profound than market-level sentiments, suggesting that neglecting the stock-level sentiment proxies in asset valuation models may lead to severe deficiencies. Originality/value - In contrast to previous studies, the authors propose that investor sentiments should be measured using a multi-level factor approach rather than a single-factor approach. The authors identified two distinct levels of investor sentiment: general market-wide sentiments and individual stock-specific sentiments.