Are All the Sentiment Measures the Same?

The author examines whether the direct and indirect sentiment measures are distinct from each other. The author finds that the 2 types of sentiment measures have a relatively low correlation between them. The direct sentiment measures have significant explanatory power on contemporaneous stock returns, whereas the indirect sentiment measures have a lagging effect in such explanatory power. If both sentiment measures are used in a model, one can observe a strong synergistic effect in adjusted R ². One can find that the indirect measures’ predictive power on future stock return is remarkably higher than that of the direct measures. Also, the indirect measures are mainly driven by short-term interest rate, whereas stock returns most drive the direct measures.