Relative Investor Sentiment Measurement

24 Pages Posted: 2 Jun 2022

See all articles by Xiang Gao

Xiang Gao

Shanghai Business School

Kees Koedijk

Utrecht University

Thomas Walther

Utrecht University - School of Economics

Zhan Wang

Research Center of Finance, Shanghai Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2022


This paper proposes a new metric to gauge investor sentiment using a relative valuation method. We combine investor behavioral finance traits and option-implied standard deviations under both the real-world probability (P) valued most in the view of uninformed investors and the risk-neutral space (Q) adopted when there exists no cognitive error. Given that investor sentiment can be thought of as risk-taking by the uninformed exceeding their informed peers, we postulate that the differences between the variance, skewness, and kurtosis of P and Q measures for investors with various behavioral traits matter. We hence construct our investor sentiment proxy by summing these differentials of variance, skewness, and kurtosis in weighted forms. It is documented that such relative investor sentiment metric exhibits economically and statistically strong return predictability for momentum portfolios. Our findings contribute to the extant literature by (1) complementing the Baker-Wurgler market-based investor sentiment index from the theoretical perspective, (2) modeling investor sentiment via utilizing the informational content of options prices, and (3) supporting the Barberis-Shleifer-Vishny definition of investor sentiment to be differences in financial market participant behavior.

Keywords: sentiment, emotional bias, cognitive error, bounded rationality, preservers, accumulators, momentum, return predictability

JEL Classification: G12, G14, G58

Suggested Citation

Gao, Xiang and Koedijk, Kees and Walther, Thomas and Wang, Zhan, Relative Investor Sentiment Measurement (May 24, 2022). Available at SSRN: or

Xiang Gao

Shanghai Business School ( email )

Shanghai Business School
2271 West Zhongshan Road
Shanghai, 200235

Kees Koedijk

Utrecht University ( email )

Vredenburg 138
Utrecht, 3511 BG
+31655186755 (Phone)

Thomas Walther (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC


Zhan Wang

Research Center of Finance, Shanghai Business School ( email )

2271 West Zhong Shan Road
Shanghai, Shanghai 200235

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