Measuring investor sentiment in the stock market

Francisca Beer and Mohamed Zouaoui ()
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Francisca Beer: California State University of San Bernardino
Mohamed Zouaoui: Université de Franche-Comté - LEG/FARGO UMR Cnrs 5118

Working Papers CREGO from Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations

Abstract: Recently, the investor sentiment measure has become one of the most widely studied areas in behavioral finance. Various measures have been developed in the literature without being to determine which measure should be used. The purpose of this study is to test their relative performance in predicting stock returns. Using a panel of investor sentiment measures, we develop a new measure of sentiment which combines direct and indirect sentiment measures. Our results show that our composite sentiment index affects the returns of stocks hard to value and difficult to arbitrage consistent with the predictions of noise trader’s models. Finally, we find that our composite index has a better predictive ability than the alternative sentiment measures largely used in the literature.

Keywords: sentiment measures; composite index; stock returns. (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-09
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