Market sentiment
Market sentiment, also known as investor attention, is the general prevailing attitude of
Market sentiment is monitored with a variety of technical and statistical methods such as the number of advancing versus declining stocks and new highs versus new lows comparisons. A large share of the overall movement of an individual stock has been attributed to market sentiment.[6] The stock market's demonstration of the situation is often described as all boats float or sink with the tide, in the popular Wall Street phrase "the trend is your friend". In the last decade, investors are also known to measure market sentiment through the use of news analytics, which include sentiment analysis on textual stories about companies and sectors.
Theory of investor attention
A particular thread of scientific literature connects results from
First approach
According to the first approach, investor attention can be approximated with particular financial market-based measures. According to Gervais et al. (2001)
The studies suggest that changes in discounts of closed-end funds are highly correlated with fluctuations in investor sentiment. Brown et al. (2003)
The aforementioned market-based measures have one important drawback. In particular, according to Da et al. (2014):
Second way
The second way to proxy for investor attention can be to use survey-based sentiment indexes. Among most known indexes should be mentioned University of Michigan Consumer Sentiment Index, The Conference Board Consumer Confidence Index, and UBS/Gallup Index of Investor Optimism. The University of Michigan Consumer Sentiment Index is based on at least 500 telephone interviews. The survey contains fifty core questions.[26] The Consumer Confidence Index has ten times more respondents (5000 households). However, the survey consists of only five main questions concerning business, employment, and income conditions. The questions can be answered with only three options: "positive", "negative" or "neutral".[27] A sample of 1000 households with total investments equal or higher than $10,000 are interviewed to construct UBS/Gallup Index of Investor Optimism.[28] Mentioned above survey-based sentiment indexes were reported to be good predictors for financial market indicators (Brown & Cliff (2005)[29]). However, according to Da et al. (2014),[14] using such sentiment indexes can have significant restrictions. First, most of the survey-based data sets are available at weekly or monthly frequency. At the same time, most of the alternative sentiment measures are available at a daily frequency. Second, there is a little incentive for respondents to answer question in such surveys carefully and truthfully (Singer (2002)[30]). To sum up, survey-based sentiment indexes can be helpful in predicting financial indicators. However, the usage of such indexes has specific drawbacks and can be limited in some cases.
Third direction
Under the third direction, researchers propose to use text mining and sentiment analysis algorithms to extract information about investors’ mood from social networks, media platforms, blogs, newspaper articles, and other relevant sources of textual data (sometimes referred as news analytics). A thread of publications (Barber & Odean (2008),[12] Dougal et al. (2012),[31] and Ahern & Sosyura (2015)[32]) report a significant influence of financial articles and sensational news on behavior of stock prices. It is also not surprising, that such popular sources of news as Wall Street Journal, New York Times or Financial Times have a profound influence on the market. The strength of the impact can vary between different columnists even inside a particular journal (Dougal et al. (2012)[31]). Tetlock (2007)[33] suggests a successful measure of investors’ mood by counting the number of "negative" words in a popular Wall Street Journal column "Abreast of the market". Zhang et al. (2011)[34] and Bollen et al. (2011)[35] report Twitter to be an extremely important source of sentiment data, which helps to predict stock prices and volatility. The usual way to analyze the influence of the data from micro-blogging platforms on behavior of stock prices is to construct special mood tracking indexes.
The easiest way would be to count the number of "positive" and "negative" words in each relevant tweet and construct a combined indicator based on this data. Nasseri et al. (2014)[36] reports the predictive power of StockTwits (Twitter-like platform specialized on exchanging trading-related opinions) data with respect to behavior of stock prices. An alternative, but more demanding, way is to engage human experts to annotate a large number of tweets with the expected stock moves, and then construct a machine learning model for prediction. The application of the event study methodology to Twitter mood shows significant correlation to cumulative abnormal returns (Sprenger et al. (2014),[37] Ranco et al. (2015),[38] Gabrovšek et al. (2017)[39]). Karabulut (2013)[40] reports Facebook to be a good source of information about investors’ mood. Overall, most popular social networks, finance-related media platforms, magazines, and journals can be a valuable source of sentiment data, summarized in Peterson (2016).[41] However, important to notice that it is relatively more difficult to collect such type of data (in most cases a researcher needs a special software). In addition, analysis of such data can also require deep machine learning and data mining knowledge (Hotho et al. (2005)[42]).
Fourth road
The fourth road is an important source of information about investor attention is the Internet search behavior of households. This approach is supported by results from Simon (1955),
Fifth source
Finally the fifth source of investor attention can also depend on some non-economic factors. Every day many non-economic events (e.g. news, weather, health condition, etc.) influence our mood, which, in term, influence the level of our risk aversion and trading behavior. Edmans et al. (2007)[54] discuss the influence of sport events on investors’ trading behavior. The authors report a strong evidence of abnormally negative stock returns after losses in major soccer competitions. The loss effect is also valid after international cricket, rugby, and basketball games. However, Abudy, Mugerman and Shust (2022)[55] document a positive stock market reaction following a victory in the Eurovision song contest. This positive effect is documented in the winning country. The authors attribute this finding to the competition structure: unlike sports tournaments that highlight the loss, the structure of the Eurovision song contest highlights the winner. Kaplanski & Levy (2010)[56] investigate the influence of bad news (aviation disasters) on stock prices. The authors conclude that a bad piece of news (e.g. about aviation disaster) can cause significant drop in stock returns (especially for small and risky stocks). The evidence that the number of sunlight minutes in a particular day influence the behavior of a trader is presented in Akhtari (2011)[57] and Hirshleifer & Shumway (2003).[58] The authors conclude that the "sunshine effect" is statistically significant and robust to different model specifications. The influence of temperature on stock returns is discussed in Cao & Wei (2005).[59]
According to the results in the mentioned study, there is a negative dependence between temperature and stock returns on the whole range of temperature (i.e. the returns are higher when the weather is cold). A seasonal affective disorder (SAD) is also known to be a predictor of investors’ mood (Kamstra et al. (2003)[60]). This is an expected result because SAD incorporates the information about weather conditions. Some researchers go even further and reveal the dependence between lunar phases and stock market returns (Yuan et al. (2006)[61]). According to Dichev & Janes (2001):[62] "...returns in the 15 days around new moon dates are about double the returns in the 15 days around full moon dates". Even geomagnetic activity is reported to have an influence (negatively correlated) on stock returns (C. Robotti (2003).[63] To sum up, non-economic events have a significant influence on trader's behavior. An investor would expect high market returns on a sunny, but cool day, fifteen days around a new moon, with no significant geomagnetic activity, preferably the day after a victory on a significant sport event. In most cases such data should be treated as supplemental in measuring investor attention, but not as totally independent one.
Currency markets
Additional indicators exist to measure the sentiment specifically on
See also
- Acertus Market Sentiment Indicator (AMSI)
- Market trend
- Pivot point (stock market)
- Sentiment analysis
- Behavioral economics
- Behavioral portfolio theory
- Behavioral Strategy
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