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Investor sentiment or information content? A simple test for investor sentiment proxies

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  • Lee, Geul
  • Ryu, Doojin

Abstract

This study suggests a simple test to assess the validity of employing a variable as an investor sentiment proxy by examining whether the variable exerts a long-run impact on prices. We also conduct the test using news sentiment indices for the U.S. and Korea, which represent a developed and influential market and a leading emerging market, respectively, as potential proxy variables. The test results, on the one hand, lead to a pessimistic view of employing news sentiment as a proxy for investor sentiment. On the other hand, the results also demonstrate a connection between news sentiment and investor sentiment, particularly in Korea. We suggest that a variable may not be appropriate as an investor sentiment proxy even when the variable is somewhat related to sentiment.

Suggested Citation

  • Lee, Geul & Ryu, Doojin, 2024. "Investor sentiment or information content? A simple test for investor sentiment proxies," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    • Handle: RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001475
    DOI: 10.1016/j.najef.2024.102222
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    More about this item

    Keywords

    Investor sentiment; Information content; News sentiment; Validity test; Nonlinear autoregressive-distributed lag;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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