Divergence of Sentiment and Stock Market Trading
43 Pages Posted: 5 Jul 2014 Last revised: 11 Feb 2017
Date Written: February 10, 2017
This paper introduces the concept of divergence of sentiment to the behavioral finance literature. We measure the distance between people with positive and negative sentiment on a daily basis for 20 countries by using data from status updates on Facebook. The prediction is that a higher divergence of sentiment leads to more diverging views on prospects and risks, and thus to more diverging views on the value of a stock. In line with this prediction, divergence of sentiment is positively related to trading volume. We further predict and find a positive relation between divergence of sentiment and stock price volatility. The observed relations are stronger when individual investors are more likely to trade. We compare the effect of our country-specific measures to a global measure of divergence of sentiment. We find that the separate effects of country-specific and global divergence measures depend on a country’s level of market integration.
Keywords: Sentiment, Disagreement Models, Divergence of Opinion, Small Investors, Market Integration, Facebook’s Gross National Happiness Index
JEL Classification: G14, G15
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