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Sentiment indices on financial markets: What do they measure?

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  • Bormann, Sven-Kristjan

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.

Suggested Citation

  • Bormann, Sven-Kristjan, 2013. "Sentiment indices on financial markets: What do they measure?," Economics Discussion Papers 2013-58, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201358
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    Cited by:

    1. Muhammad Zia Ur Rehman & Zain ul Abidin & Faisal Rizwan & Zaheer Abbas & Sajjad Ahmad Baig, 2017. "How investor sentiments spillover from developed countries to developing countries?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1309096-130, January.
    2. Betül Kalaycı & Ayşe Özmen & Gerhard-Wilhelm Weber, 2020. "Mutual relevance of investor sentiment and finance by modeling coupled stochastic systems with MARS," Annals of Operations Research, Springer, vol. 295(1), pages 183-206, December.
    3. Hilary Tinotenda Muguto & Lorraine Rupande & Paul-Francois Muzindutsi, 2019. "Investor sentiment and foreign financial flows: Evidence from South Africa," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 37(2), pages 473-498.
    4. Baumann, Michael Heinrich & Baumann, Michaela & Erler, Alexander, 2019. "Limitations of stabilizing effects of fundamentalists: Facing positive feedback traders," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-26.
    5. LUPU, Iulia, 2018. "Analysis Of How The European Stock Markets Perceive The Dynamics Of Macroeconomic Indicators Through The Sentiment Index And The Purchasing Managers' Index," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 22(1), pages 32-52.

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    More about this item

    Keywords

    sentiment indices; investor sentiment; factor analysis; psychological analysis; financial markets;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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