Mohamed Zouaoui

Measuring Investor Sentiment in the Stock Market

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.