The Construction of an Investor Sentiment Index for Sweden and its Impact on the Stock Market

Abstract: Investor sentiment is an important research object in behavioral finance, and its analysis has been one of the hot topics in stock market research recently. As an abstract concept, investor sentiment needs to be visualized by the construction of the investor sentiment index. In 2006, Baker and Wurgler proposed the Baker & Wurgler (BW) index, which can reflect investor sentiment in the American market. Based on the fundamental investor sentiment index BW, we develop and propose a new index RSent adapted to the Swedish market by principal component analysis. The new index RSent involves six variables (economic sentiment index, consumer confidence index, turnover, IPO number, IPO return, and equity-to-debt ratio) and constrains it by the macroeconomic environment’s impact. Furthermore, we explored the impact of this index on the Swedish stock market performance as represented by OMXS 30 and OMXS PI. We find that this investor sentiment has a positive impact on the Swedish stock market performance.