Relative investor sentiment

Abstract

We propose a new investor sentiment index by estimating the differences between moments from realized stock returns and option-implied moments. Validating the Relative Investor Sentiment index, we show that the index is correlated with other proxies, exhibits known patterns of stock market reactions to sentiment shocks, is stronger for hard-to-arbitrage assets, and is complementary to alternative sentiment measures on a monthly and daily horizon. Using our monthly index, we show that momentum strategies perform significantly better during high sentiment periods and even worse in low sentiment periods.