Investor Sentiment Measures Purged: A Necessary Double Check on Sentiment Impact
European Finance Association 44th Annual Meeting Paper
Posted: 28 Jun 2019 Last revised: 23 Dec 2020
Date Written: November 11, 2020
The investor sentiment measures based on market variables underperform those sentiment measures extracted from investor surveys in various applications. By purging the fundamental component out of the market-variable-based sentiment measures thoroughly, we propose a largely contamination-free sentiment measure, which no longer underperforms survey-based measures. Generally, the issue of contamination caused by fundamentals can be a hidden risk for market-variable-based measures, which may cause failures in detecting sentiment impact and misinterpreting risk-based results with behavioral stories. Overall, a double check using the contamination-free measure could be important and necessary.
Keywords: Investor Sentiment, Cross-Sectional Returns, Partial Least Squares, Principal Components, Mutual Fund Flows
JEL Classification: C53, G02, G12, G14, G17
Suggested Citation: Suggested Citation