A direct measure of investor sentiment

Haiyuan Yin, Sophie X. Kong and Wenjuan Kou

International Review of Finance, 2025, vol. 25, issue 1

Abstract: A new measure of investor sentiment is introduced and tested in this study. Different from using search volume of certain macroeconomic terms to capture investor attention/sentiment, this new measure is crafted from analyzing and classifying the sentiment contents of textual comments of retail investors active in a major Chinese stock forum. Different from the traditional sentiment studies linking market‐level sentiment to market‐wide reactions, this uncomplicated measure is constructed for individual stocks and subsequently, reactions of the same stocks are tracked and examined, offering a more direct and precise correlation test. In our validation tests, we show a significantly positive correlation between investor sentiment and three stock market parameters that is, stock return, price volatility, and information efficiency. Specifically, a positive sentiment is associated with higher stock returns and a higher degree of information efficiency as well as higher price volatility. These associations seem to attenuate with improvement in the information environment, such as better investor protection.

Date: 2025
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International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

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