Two Measures of Firm-Specific Investor Sentiment : An Application in Australia

The overnight return and the principal component analysis (PCA) - based proxy are two approaches to measuring the firm-specific investor sentiment by technical indicators. The objective of this paper is to explore the effects of sentiment on stock returns and provide advice for short-run trading by measuring the sentiment using technical indicators which are more flexible and efficient for high-frequency dimensional data than the commonly used market sentiment and text-based sentiment measures. However, whether the two approaches, overnight return and the principal component analysis (PCA), are appropriate to measure firm-specific investor sentiment to derive profitable returns for the Australian stock market. To determine this, we analyzed whether these two approaches possessed characteristics expected of a sentiment measure, i.e., short-run persistence, more pronounced persistence for harder-to-value firms, and long-run reversal. We also applied these two sentiment measures to short-term trading for some sectors. Our evidence fails to support overnight return to be served as a measure of firm-specific investor sentiment for the Australian market, while the PCA-based proxy can be applied to measure firm-specific investor sentiment for the Australian stock market as it generally satisfied the three characteristics expected for measures of investor sentiment. In addition, we demonstrated that these two firm-specific investor sentiment measures could be utilized in practice to earn good profits for short-run trade