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

See all articles by Liya Chu

Liya Chu

East China University of Science and Technology (ECUST)

Qianqian Du

Southwest University of Finance and Economics

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Date Written: November 11, 2020

Abstract

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

Chu, Liya and Du, Qianqian and Tu, Jun, Investor Sentiment Measures Purged: A Necessary Double Check on Sentiment Impact (November 11, 2020). European Finance Association 44th Annual Meeting Paper , Available at SSRN: https://ssrn.com/abstract=3410350

Liya Chu (Contact Author)

East China University of Science and Technology (ECUST) ( email )

Shanghai
China

Qianqian Du

Southwest University of Finance and Economics ( email )

Riem of SWUFE
chengdu, Sichuan 611130
China

Jun Tu

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
#04-01
Singapore, 178899
Singapore

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