Divergence of sentiment and stock market trading

Siganos, Antonios; Vagenas-Nanos, Evangelos; Verwijmeren, Patrick

Abstract

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.

Citation

Siganos, A., Vagenas-Nanos, E., & Verwijmeren, P. (2017). Divergence of sentiment and stock market trading. Journal of Banking and Finance, 78, 130-141. https://doi.org/10.1016/j.jbankfin.2017.02.005

• Journal Article Type: Article
• Acceptance Date: Feb 10, 2017
• Online Publication Date: Feb 11, 2017
• Publication Date: 2017-05
• Deposit Date: Jul 6, 2021
• Journal: Journal of Banking & Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 78
• Pages: 130-141
• DOI: https://doi.org/10.1016/j.jbankfin.2017.02.005
• Keywords: Sentiment, Disagreement models, Divergence of opinion, Small investors, Market integration
• Public URL: http://researchrepository.napier.ac.uk/Output/2785032