Relative Investor Sentiment Measurement

27 Pages Posted: 23 Jun 2022

See all articles by Xiang Gao

Xiang Gao

Shanghai Business School

Kees Koedijk

Tilburg 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: June 2022


This paper proposed a new metric to gauge investor sentiment using a relative valuation method. We combine investor behavioral traits and option-implied standard deviations under both the real-world probabaility valued most in the view of the uninformed investors and the risk-neutral space adopted when there exists no cognitive error. Given that investor sentiment can be thought of as risk taking by the uniformed exceeding their informed peers, we postulate that the differences between variance, skewness and kurtosis mesures for investors with various behavioral traits.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 porfolios. Our findings contribute to the extant literature by 1) complementing the Baker-Wurgler market-based investor sentiment index from a

theoretical perspective 2) modelling investor sentiment via utilizing the informational content of options prices and 3) supporting the Barberis-Schleifer-Vishny definition of investor sentiment to be differences in financial market participant behavior.

Keywords: accumulators, cognitive error, emotional bias, Momentum, preservers, return predictability, sentiment

JEL Classification: G12, G14

Suggested Citation

Gao, Xiang and Koedijk, Kees and Walther, Thomas and Wang, Zhan, Relative Investor Sentiment Measurement (June 2022). CEPR Discussion Paper No. DP17370, Available at SSRN:

Xiang Gao (Contact Author)

Shanghai Business School ( email )

Shanghai Business School
2271 West Zhongshan Road
Shanghai, 200235

Kees Koedijk

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE

Thomas Walther

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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