What is Investor Sentiment?
Finance discussions have been divided between the efficient markets hypothesis (EMH) as a good explanation for asset returns unpredictability and the persistent search for value by market practitioners. According to Fisher Black, “markets look a lot less efficient from the banks of the Hudson than from the banks of the Charles”. Charles River is in Boston, where we can find Harvard and MIT, while Hudson River goes through New York, where the financial market really is. Hence, it is a good challenge to analyze the investor expectations regarding future changes of asset prices. Stock prices can be written as expected discounted dividends: p = E(c) / k where p is the stock price, c is the dividend stream and k is the discount rate. Hence, any p advance or decline should be a result of change of discount rate and/or expected dividend stream. We define Investor Sentiment as the expectations of investors and other financial market practitioners, such as analysts, traders, asset managers and
