By Matthias Burghardt

Investor sentiment and behaviour play a tremendous position in monetary markets. utilizing a special facts set which includes greater than 36.5 million submitted retail investor orders over the process 5 years, Matthias Burghardt constructs an leading edge retail investor sentiment index. He indicates that retail traders’ buying and selling judgements are correlated, that retail traders are contrarians, and ecocnomic buying and selling procedure could be in response to those aggregated sentiment measures.

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Extra info for Retail Investor Sentiment and Behavior: An Empirical Analysis

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Meta-Measures Composite Sentiment by Brown and Cliff Brown and Cliff (2004) demonstrate that surveys measuring investor sentiment are related to other popular measures of investor sentiment and recent stock market returns. They extract the common component(s) of the different sentiment measures and hope that it represents a cleaner measure of investor sentiment. In order to exploit as much information as possible and efficiently include all of the information about the ‘true unobservable sentiment’, they combine the various sentiment measures and use two well-established methods to extract common features of the data: the Kalman filter and principal component analysis.

Hong and Stein (1999) enhance their model by expanding the strategies of the momentum traders to increase the degree of rationality. They are now able to act not only as momentum traders but as contrarians. In addition, they can choose a better model to predict prices and base their decision on several past periods. However, it is shown that the results from the basic model still hold. Even with the addition of a third group of traders – the smart money – Hong and Stein (1999) still explain underreaction, the momentum effect and the resulting overreaction.

2. 1. The Closed-End Funds Discount One of the first and also the best known academic study of investor sentiment using market data is the closed-end funds discount (CEFD) authored by Lee, Shleifer, and Thaler (1991), and has been the source of much debate. The basic premise of the study is that since retail investors are known to disproportionately hold closed-end funds, the CEFD can be interpreted as a measure of investor sentiment. 2 Sentiment Measures in Research 39 Closed-end funds are collective investment schemes with a limited number of shares.

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