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Divergence of sentiment and stock market trading

Antonios Siganos, Vagenas-Nanos, Evangelos and Patrick Verwijmeren

Journal of Banking & Finance, 2017, vol. 78, issue C, 130-141

Abstract: This paper introduces the concept of divergence of sentiment to the behavioral finance literature. We measure the distance between people with positive and negative sentiment on a daily basis for 20 countries by using data from status updates on Facebook. The prediction is that a higher divergence of sentiment leads to more diverging views on prospects and risks, and thus to more diverging views on the value of a stock. In line with this prediction, divergence of sentiment is positively related to trading volume. We further predict and find a positive relation between divergence of sentiment and stock price volatility. The observed relations are stronger when individual investors are more likely to trade. We compare the effect of our country-specific measures to a global measure of divergence of sentiment. We find that the separate effects of country-specific and global divergence measures depend on a country's level of market integration.

Keywords: Sentiment; Disagreement models; Divergence of opinion; Small investors; Market integration (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jbfina:v:78:y:2017:i:c:p:130-141