A New Investor Sentiment Indicator Based on Return Decomposition

Liu Yuan (), Shang Yan (), Shi Jianming and Wang Shouyang
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Liu Yuan: Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing100190, China
Shang Yan: School of Economics and Management, University of Chinese Academy of Sciences, Chinese Academy of Sciences, Beijing100190, China
Shi Jianming: Graduate School of Management, Tokyo University of Science, 1-3, Kagurazaka Shinjyuku-Ku, Tokyo, Japan
Wang Shouyang: Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing100190, China

Journal of Systems Science and Information, 2016, vol. 4, issue 2, 121-130

Abstract: This paper extends the DSSW model to accommodate rational arbitrageurs, optimistic investors and pessimistic investors. We model the price impact by using daily data and create a new methodology to calculate the optimistic and the pessimistic. The new sentiment indicator has high correlation with the other traditional ones, and as a proxy variable of individual share or financial market on daily, it could distinguish the optimistic and the pessimistic. In the empirical research, we develop a time-series model and a cross-section model respectively to explore the explanatory power of highly frequent investor sentiment to idiosyncratic volatility and capital asset mispricing. The results show that the new sentiment indicator can explain 21.31% of idiosyncratic volatility to individual share on average, and it has a great explanation of 36% to capital asset mispricing.

Keywords: DSSW model; investor sentiment; idiosyncratic volatility; asset mispricing (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:jossai:v:4:y:2016:i:2:p:121-130:n:2

DOI: 10.21078/JSSI-2016-121-10

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