Investor Sentiment: How It Drives Stock Returns

Abstract

As investors become more involved in financial markets, the “rational person” assumption of traditional finance theory is facing challenges. And the rise of behavioral finance has made investor sentiment the central topic of research. This article seeks to explore how investor sentiment influences stock returns and systematically examine this issue from three different perspectives: firstly, analyze the multidimensional factors that affect investor sentiment, including individual level, stock level, and environmental level; secondly, we will analyze investor sentiment’s impacts on stock returns, including positive and negative effects, short-term and long-term effects, the impact of different market environments and stocks; finally, various methods for measuring investor sentiment are summarized, including directly or indirectly related index indicators, composite index indicators, and media or text data index indicators. Building on the summarized research conclusions, this article highlights directions for future research. The objective is to conduct an in-depth analysis of the long-term impact mechanisms of investor sentiment and to investigate effective methods for utilizing sentiment indicators to enhance the accuracy of market forecasting.