Emotional Nature Of Financial Sentiment Markets

Emotional Nature Of Financial Sentiment Markets

Although we like to believe that our purchases sentiment are base on facts and rational calculations, the truth is that they often influence by emotions. Are we thinking in terms cost and benefit when we spend on expensive food, clothes, or electronic gadgets? Or are we reacting to stress, frustration or joy?

Financial markets can also be ask the same. The efficient markets hypothesis a popular theory that suggests stock prices driven purely by rational calculations. However, traders are humans and emotions can affect their decisions. Are these emotions reflect in the stock market?

This is because emotions can’t be observe. Although emotions can be observe in actions, not all actions (e.g. aggressive behaviour or language) can be capture by data.

What if you could measure the mood in a country, and then link it to financial market behaviour? This is possible thanks to Spotify.

The Journal of Financial Economics published our research using music as a measure of national sentiment that influences market behaviour. This research is based on the idea of mood congruence, which states that music choices can reflect people’s moods (e.g. sad songs at funerals or happy songs at parties).

Spotify offers aggregated listening data for a country as well as an algorithm to classify the positive or negative aspects of each song. These inputs are used to calculate music sentiment, which is a measure of a country’s sentiment express in the positiveness of its citizens songs.

What Is The Most Common Way To Measure Sentiment?

Investor sentiment can be define as the general feeling among investors about a market or asset. Although this definition is well-accept, it is difficult to find an accurate measure that isn’t influence by economics.

Natural measures such as consumer confidence, GDP growth and unemployment all have direct economic impacts. For example, the stock market may rise if there is a high index of consumer confidence. However, this does not necessarily mean that emotions are directly affecting the stock market.

The rise could instead be explain by an improvement in business and employment conditions, which what the index is built on. Another option is to search for other mood proxy indicators of national sentiment.

What Is The Most Common Way To Measure?

Investor sentiment can be define as the general feeling among investors about a market or asset. Although this definition is well-accept, it is difficult to find an accurate measure that isn’t influence by economics.

Natural measures such as consumer confidence, GDP growth and unemployment all have direct economic impacts. For example, the stock market may rise if there is a high index of consumer confidence. However, this does not necessarily mean that emotions are directly affecting the stock market.

The rise could instead be explain by an improvement in business and employment conditions, which what the index is built on. Another option is to search for other mood proxy indicators of national sentiment.

Our study is unique because it identifies a measure that reflects a national mood. No matter what causes it, citizens music choices reflect their moods.

Spotify listening data has proven to be more accurate than traditional consumer confidence surveys in predicting consumer confidence https://107.152.46.170/judi-bola/livescore.

Stock Markets React Too Strongly To Sentiment

We found that higher sentiment correlates with higher stock market returns. This also results in lower returns the following week, which suggests that the initial reaction to the stock market was temporary.

These results could be argue to show a spurious correlation similar to the Super bowl effect, where the winner of the Super bowl predicts the US stock market, even though there’s no rational or behavioural reason for it.

Our results are consistent across 40 countries, and we do not believe that outliers have skew the data. The result is also robust across all asset classes. Our main results are base on stocks but we also found that high music sentiment is associate to greater equity mutual fund purchases.

A high music sentiment correlates with lower returns on government bonds. This indicates that investors are switching from safe bonds to risky stocks.