Investor sentiment or information content? A simple test for investor sentiment proxies

Geul Lee and Doojin Ryu

The North American Journal of Economics and Finance, 2024, vol. 74, issue C

Abstract: This study suggests a simple test to assess the validity of employing a variable as an investor sentiment proxy by examining whether the variable exerts a long-run impact on prices. We also conduct the test using news sentiment indices for the U.S. and Korea, which represent a developed and influential market and a leading emerging market, respectively, as potential proxy variables. The test results, on the one hand, lead to a pessimistic view of employing news sentiment as a proxy for investor sentiment. On the other hand, the results also demonstrate a connection between news sentiment and investor sentiment, particularly in Korea. We suggest that a variable may not be appropriate as an investor sentiment proxy even when the variable is somewhat related to sentiment.

Keywords: Investor sentiment; Information content; News sentiment; Validity test; Nonlinear autoregressive-distributed lag (search for similar items in EconPapers)
JEL-codes: C22 E44 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001475

DOI: 10.1016/j.najef.2024.102222

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