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

Kresta, Aleš; Xiong, Jialei; Maidiya, Bahate

doi:10.2478/bsrj-2024-0018

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.

References

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