Measures and Applications of Investor Sentiment

This article examines measures and applications of investor sentiment in the past three decades. How to measure investor sentiment more effectively and quantify its economic consequences is important for academic researchers, investment advisors, portfolio managers, and investors. Investor sentiment is a latent variable that needs to be derived from appropriate proxies in empirical studies to test theoretical predictions. The authors classify various measures of investor sentiment documented in prior literature into seven categories and provide a discussion about the validity and shortcomings of each category. They provide a survey of various economic consequences of investor sentiment in the United States and in international and local markets. They further review prior studies that construct portfolios and trading strategies based on investor sentiment and provide suggestions for future sentiment research.