Measuring investor sentiment is a complex task, but there is no real obstacle to identifying imprecise indicators that retain their utility over time. To this end, we examine a number of general considerations in the process of measuring investment sentiment and examine the proxy indicators that have been adopted for this purpose.
Various models have been developed to measure investor sentiment, but some of these models may contain idiosyncratic components unrelated to sentiment. For example, the liberalization of stock trading fees in 1975 and the subsequent long reduction in trading costs led to a ten-year stock market uptrend, so using the percentage difference in returns will eliminate the idiosyncratic component of the price index.
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| Sentiment index |
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