Sentiment and Stock Characteristics: Comprehensive Study of Individual Investor Influence on Returns, Volatility, and Trading Volumes

Abstract Background Traditional asset pricing models face challenges from financial anomalies, prompting exploration through behavioural finance theory. This study analyses the nuanced relationship between individual investor sentiment and key stock market variables. Objectives To assess the impact of individual investor sentiment on stock returns, volatilities, and trading volumes using the American Association of Individual Investors (AAII) sentiment index. Methods/Approach Using regression models, we examine the relationship between individual investor sentiment and various stock characteristics across 480 components of the Standard & Poor's 500 index. Results We find a positive relationship between the AAII sentiment index and stock returns and a negative relationship with volatility and trading volume. Conclusions Our study contributes to understanding the intricate role of individual investor sentiment in financial markets.