EconPapers    
Economics at your fingertips  
 

Relative Investor Sentiment Measurement

Xiang Gao, Kees Koedijk, Thomas Walther and Zhan Wang

No 17370, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper proposed a new metric to gauge investor sentiment using a relative valuation method. We combine investor behavioral traits and option-implied standard deviations under both the real-world probabaility valued most in the view of the uninformed investors and the risk-neutral space adopted when there exists no cognitive error. Given that investor sentiment can be thought of as risk taking by the uniformed exceeding their informed peers, we postulate that the differences between variance, skewness and kurtosis mesures for investors with various behavioral traits.We hence construct our investor sentiment proxy by summing these differentials of variance, skewness and kurtosis in weighted forms. It is documented that such relative investor sentiment metric exhibits economically and statistically strong return predictability for momentum porfolios. Our findings contribute to the extant literature by 1) complementing the Baker-Wurgler market-based investor sentiment index from a theoretical perspective 2) modelling investor sentiment via utilizing the informational content of options prices and 3) supporting the Barberis-Schleifer-Vishny definition of investor sentiment to be differences in financial market participant behavior.

Keywords: Sentiment; Emotional bias; Cognitive error; Preservers; Accumulators; Momentum; Return predictability (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2022-06
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17370 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17370

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17370

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:cpr:ceprdp:17370