Journal of Behavioral Finance

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Emotions in the Stock Market

John Griffith, Mohammad Najand & Jiancheng Shen

To cite this article: John Griffith, Mohammad Najand & Jiancheng Shen (2019): Emotions in the
Stock Market, Journal of Behavioral Finance, DOI: 10.1080/15427560.2019.1588275

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Published online: 29 Apr 2019.

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JOURNAL OF BEHAVIORAL FINANCE
https://doi.org/10.1080/15427560.2019.1588275

Emotions in the Stock Market

John Griffitha , Mohammad Najanda, and Jiancheng Shenb
a
Old Dominion University; bTaylor University

ABSTRACT KEYWORDS
The authors explore the interaction between media content and market returns and volatil- Behavioral finance; Investor
ity. They utilize propriety investor sentiment measures developed by Thompson Reuters sentiment; Media content;
MarketPsych. The data are from a commercial-strength comprehensive textual analysis that Market returns; Volatility
provides 24-hr rolling average scores of total references in the news and social media by
counting overall positive references net of negative references. The authors select 4 meas-
ures of investor sentiment that reflect both pessimism and optimism of small investors.
These measures are fear, gloom, joy, and stress. The objective is twofold. First, the authors
examine the ability of these sentiment measures to predict market returns. Second, they are
interested in exploring the effects of these sentiment measures on market return and vola-
tility. For this purpose, the authors utilize threshold generalized autoregressive conditional
heteroskedasticity models. They explore the ability of sentiment measures to predict both
the level of and change in market returns. The sentiment measure of stress has a small
effect on the market return for a 1-day lag. The other 2 sentiment measures, gloom and joy,
seem to play no role in predicting market returns. Furthermore, the authors find that fear
among investors has a major and lasting effect on market returns and conditional volatility.

Introduction Investors’ overconfidence about private signals and

The development of neuroscience over the last 2 deca-
des has shown that human behaviors, including eco-
nomic behaviors, are strongly influenced by the finely
tuned affective processes operating in our brain sys-
tem (Elster [1998], Lowenstein [2000], Camerer,
Loewenstein, and Prelec [2005]). Emotion, as a signifi-
cant reflection of our affective processes, can produce
a transient but significant impact on economic deci-
sion making and activities at both the individual and
societal levels (Lowenstein [2000], Camerer et al.
[2005]). In their experiments, neuroeconomists have
also detected that human emotion and cognitive
thinking are constantly intertwined (Lo, Repin, and
Steenbarger [2005], Fenton-O’Creevy, Soane,
Nicholson, and Willman [2011]). Scientific evidence
on the correlations between human emotions and eco-
nomic outcomes provide guidelines for finance
researchers to study investor emotion and its effects
on the financial market.
The 2 most famous financial anomalies, stock price
momentum and stock price reversal, can be addressed
by investors’ overreaction or underreaction to public
information triggered by their psychological biases.
their biased self-attribution contribute to under- and
overreactions in the securities market, where market
fundamentals correct investors’ psychological biases in
the long run (Daniel, Hirshleifer, and Subrahmanyam
[1998]). Additionally, the representativeness heuristic
and conservatism are other psychological biases that
can trigger asset pricing anomalies. Investors under-
react to inadequate pieces of good news, while they
overreact to an abundance of good news. This over-
reaction leads to subsequent low returns in the correc-
tion (Barberis, Shleifer, and Vishny [1998], Smales
[2015]). Different styles of traders generate different
types of biases toward securities pricing. News watch-
ers tend to underreact to private information, and
momentum traders opt to form investment portfolios
conditional on a subset of past prices. Under- and
overreactions arise from the interaction of momentum
traders and news watchers, which can be corrected by
market fundamentals in the long run (Hong and Stein
[1999]). All of the previous articles addressing invest-
ors’ psychological biases highlight basic reasons for
financial market anomalies that do not perfectly con-
form to traditional risk-return tradeoff beliefs in the

CONTACT John Griffith jgriffit@odu.edu Department of Finance, Strome College of Business, Old Dominion University, 1 Old Dominion University,
Norfolk, VA 23529.
Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/hbhf.
ß 2019 The Institute of Behavioral Finance
2 J. GRIFFITH ET AL.
short run; however, these anomalies submit to effi-
cient market equilibrium in the long run.
Because the content of financial information in
modern media sources is tremendously rich, quantifying
the information on investor psychology within those
media contents is beneficial for financial professionals.
With the development of content analysis and machine
learning technologies, researchers can transform qualita-
tive information on investor psychology within media
sources into quantitative measurements and then apply
those measurements in studying financial market
anomalies. Confirming this pattern, numerous subscrib-
able financial news databases have been developed in
the past several years, including RavenPack, Thomson
Reuters News Analytics, Thomson Reuters MarketPsych
Index (TRMI), Bloomberg News Analytics, and
LexisNexis. The availability of market-wide investor
psychology datasets offers opportunities for empirically
studying investor psychology-related investment activ-
ities in the financial market.
In this article, we empirically test the 4 commonly
documented investor emotions (fear, gloom, joy,
stress) and their effects on the stock market. We use
the threshold generalized autoregressive conditional
heteroskedasticity (TGARCH) model to study the cor-
relation between S&P 500 index returns and 4 distinct
investor emotions from January 1, 1998, to December
31, 2014. Furthermore, the vector autoregressive
results suggest that emotion-associated abnormal
returns undergo rapid reversals within 5 days, which
is consistent with the short-term predictive model of
media-based sentiment on stock returns up to 5 days
(Tetlock [2007], Garcia [2013]). Our 4 market-level
emotion indicators (fear, gloom, joy, stress) are from
TRMI, which is constructed based on a comprehen-
sive textual analysis of sources from news wires,
Internet news sources, and social media with a set of
proprietary psychology dictionaries. In contrast to
previous media-based sentiment studies, we expand
the single dimension of the investor sentiment index
to multiple dimensions of emotion indices. More
importantly, our emotion indicators are established
based on a collection of media sources covered by
over 2 million news articles and posts every day
(Peterson [2013], Huang, Lehkonen, Pukthuanthon,
and Zhou [2018]), whereas most prior textual analyses
of media contents rely on a single source. The collect-
ive source approach in studying media-related
investor psychology is more likely to reflect the true
information of the market psychological bias. At the
collective level of media sources, the consensual
knowledge on investor emotion covered by each single
media source further contributes to canceling out
noisy opinions and rumors from unreliable sources.
The rest of the article is organized as follows. The
next section summarizes previous studies on the
effects of the 4 common investor emotions (fear,
gloom, joy, stress) on the financial market. The subse-
quent section describes the datasets and the empirical
methodology. Then, the following section describes
the research data and empirical models. This section
is followed by a section that provides empirical results
based on several predictive models of investor emo-
tion and S&P 500 index returns. The robustness
checks examine the effect of investor emotion among
alternative measures of TRMI emotion indicators. The
article concludes with a list of several main contribu-
tions and a suggested avenue for future researchers.
Emotions in financial market
Emotion psychologists believe that investors’ emotion
affects their assessments of risk and the monetary
value of investment securities (Lerner and Keltner
[2000], Han, Lerner and Keltner [2007]). The valence-
based approach and the appraisal-based approach are
2 main approaches that dominate human emotion
studies. In discussing emotion, valence refers to the
effects of positive versus negative feeling states
(Barrett [2006]). Researchers have argued that the spe-
cific emotions of the same valence could have differ-
ent effects on decision making; for example, fear
promotes pessimistic risk estimates and risk-averse
choices, while anger encourages optimistic risk esti-
mates and risk-seeking choices (Lerner, Goldberg, and
Tetlock [1998], Lerner and Keltner [2000, 2001],
Tiedens and Linton [2001]). Appraisal theorists con-
tend that emotions can be distinguished at a more
fine-grained level as a person’s appraisal or cognitive
response to a specific situation (Lerner and Keltner
[2000, 2001], Tiedens and Linton [2001]). “Buy on fear,
sell on greed” illustrates how distinct dimensions of
emotions can influence investors’ investment strategies.
With the emergence of experimental finance and
neurological finance in the last 2 decades, researchers
utilize modern neurological technologies (functional
magnetic resonance imaging, voice analysis, facial rec-
ognition) to detect investors’ or corporate managers’
emotions and further study their financial decision
making and investment performance. Kuhnen and
Knutson [2011] verified that emotional states influ-
ence risk taking. They documented that positive emo-
tional states motivate investors to have risky
investment portfolios, while negative emotional states

hinder them from doing so. In 2 different studies,
Mayew and Venkatachalam [2012] and Price, Seiler,
and Shen [2017] utilized layered voice analysis soft-
ware to isolate managers’ vocal cues in their earnings
conference calls. Mayew and Venkatachalam depicted
that investors reacted to managers’ vocal cues in a
pattern whereby they picked up cumulative abnormal
returns around conference calls, and those returns
extended out 6 months. Price, Seiler, and Shen found
that investors appear to overreact to managers’ emo-
tional vocal cues in conference calls, whereas there is
a rapid correction to this short-run overreaction.
Very little empirical research has been conducted
to show that investors’ moods and emotions affect
securities valuations; however, there is already
adequate research that demonstrates that investor sen-
timent has a large impact on expected return and
stock price volatilities. Lee, Jiang, and Indro [2002]
employed GARCH models to test the effect of
investor sentiment on weekly return volatility and
excess return using the Dow Jones Industrial Average,
S&P 500, and the Nasdaq indices from 1973 to 1995.
Their results support that there is a positive correl-
ation between excess return and a shift in investor
sentiment and a negative correlation between return
volatility and a shift in investor sentiment. Brown and
Cliff [2004, 2005] documented that sentiment affects
asset valuations. They found that sentiment is strongly
correlated with contemporaneous market returns but
has little predictive power for near-term returns. They
further found that future 2- to 3-year horizon market
returns are negatively related to investor sentiment.
Baker and Wurgler [2006] studied the investor senti-
ment effects on the cross-section of stock returns.
Based on their study, the cross-section of future stock
returns is conditional on beginning-of-period proxies
for sentiment. Sentiment has the strongest effect on
stocks that are characterized as small, young, highly
volatile, unprofitable, non–dividend paying, extreme
growth, or distressed. The previous investor sentiment
research adopted economic-based or survey-based sen-
timent metrics. The traditional investor sentiment
measures adopt a range of methods, including
investor surveys (Brown and Cliff [2004]), closed-end
fund discounts (Zweig [1973], Neal and Wheatley
[1998]), trading volumes (Baker and Stein [2004]),
and composite sentiment indices based on the first
principal component of common sentiment proxies
(Baker and Wurgler [2006], Gao and Suss [2015]).
In recent years, more accurate and efficient senti-
ment measures have been invented from increasingly
sophisticated textual content analysis coupled with
JOURNAL OF BEHAVIORAL FINANCE 3
more extensive field-specific dictionaries. Tetlock
[2007] implemented content analysis in financial
research by running a word-counting method based
on the Harvard Psychosocial Dictionary. Loughran
and McDonald [2011] argued that the words identi-
fied as negative by this dictionary are typically not
negative words in financial contexts. They develop a
financial context-based dictionary incorporating 6-
word classifications. Utilizing firm-specific news senti-
ment data provided by Thomson Reuters News
Analytics, Smales [2015] constructed aggregate meas-
ures to examine the relationship between news senti-
ment and stock market returns over the period
2004–2010. He found a highly significant relationship
between aggregated measures of news sentiment and
stock returns that fluctuates over time and by indus-
try. Smales identified a link between the time-vari-
ation of news sentiment impact and industry beta and
determines that levels of investor sentiment play an
important role in explaining this variation. Jegadeesh
and Wu [2013], in a recent content analysis model,
proposed that the appropriate choice of term weight-
ing in content analysis is more important than a com-
plete and accurate compilation of the word list. The
availability of advanced content analysis methodolo-
gies allows financial professionals to capture market
sentiment and emotion from different news media
and social media contents.
Media plays an essential role in diffusing informa-
tion in financial markets (Peress [2014]). The effect of
investor sentiment and emotion is also propagated
rapidly through media among different groups of
financial analysts, journalists and investors. Media has
become the key player in setting the stage for market
moves and provoking them (Shiller [2000], Garcia
[2013]). News media and social media are the 2 most
popular channels through which to communicate
information in written forms. Research articles have
documented that stock prices are influenced by the
sentiment reflected in both market-level media sources
and firm-specific news stories. Tetlock [2007] found
that high media pessimism predicts downward pres-
sure on market prices followed by a reversion to fun-
damentals. Tetlock, Saar-Tsechansky, and Macskassy
[2008] extended this line of research into a cross-sec-
tional study of individual firms’ news sentiment effects
on their accounting earnings and stock returns. Their
main findings indicate that the negative content in the
firm-specific news is related to low firm earnings;
firms’ stock prices underreact to the information
embedded in negative words, which suggests a short-
run momentum trading strategy; and the negative
4 J. GRIFFITH ET AL.
words in the news about fundamentals have the larger
predictive power for both earnings and returns. A
time series study of stock return responses to financial
news sentiment from 1905 to 2005 was conducted by
Garcia. Leinweber and Sisk [2011] included event
studies and U.S. portfolio simulation results for “pure
news” signals applied over 2006–2009. Research has
suggested that news content predicts stock returns on
a daily basis. Heston and Sinha [2017] used a dataset
of more than 900,000 news stories to test whether
news can predict stock returns. They measured senti-
ment with a proprietary Thomson Reuters neural net-
work and found that daily news predicts stock returns
for only 1 to 2 days. Uhl, Pedersen, and Malitius
[2015] combined company- and macro-specific news
sentiment from around 100,000 news pieces per week
and used the CUSUM filter method to calculate
momentum in news sentiment. The predictive power
is particularly strong during economic recessions
because investors’ sensitivity to news is heightened
when they encounter hard times.
Along with the rapid growth of social media appli-
cations in online communication, a line of research
on social media-based information and sentiment’s
impact on stock market activities has recently arisen
as a frontier study area. Chen, De, Hu, and Hwang
[2014] studied whether investor opinions that appear
on social media have predictive power for future stock
returns and earnings surprises. They found that in
addition to information reported in news media, the
views expressed in both articles and commentaries on
social media strongly correlate with future stock
returns and earnings surprises. Karabulut [2013] treats
Facebook’s Gross National Happiness (GNH) Index as
an equivalent measure of investor sentiment. In an
empirical study, he found that changes in both daily
returns and trading volume in the U.S. stock market
can be affected by Facebook’s GNH, and those influen-
ces are shown to be temporary effects. Sun, Najand,
and Shen [2016] further explored the predictive rela-
tion between high-frequency investor sentiment and
stock market returns. The empirical evidence suggested
that intraday S&P 500 index returns can be predicted
by lagged half-hour investor sentiment. The sentiment
index used in this study and Huang, Lehkonen,
Pukthuanthon, and Zhou [2018] is from the TRMI,
which is computed based on a comprehensive collec-
tion of both traditional and social media sources.
Many other media-caused biases on asset prices
have also received increasing attention in academic
research. Several financial studies have investigated
how news coverage and investor attention could drift
stock performance in the financial market. Fang and
Peress [2009] documented that stocks not covered by
the news media earn higher future returns than those
that are highly covered. Their interpretation is that
stocks with high media coverage have a lower infor-
mational risk, so those stocks require a lower return
to compensate for the lower risk. Da, Engelberg, and
Gao [2014] applied search frequency in Google as a
measure of investor attention. They found that an
increase in search volume leads to a higher stock price
in a 2-week time horizon and that the stock price
eventually drops down in the long run. Barber and
Odean [2008] hypothesized that investor attention can
be a scarce resource for individuals, but it is not as
scarce for institutional investors. However, Fang,
Peress, and Zheng [2014] found that mutual funds
tend to buy stocks with high media coverage, whereas
their sells are less influenced by media coverage. The
finding that sells are less influenced by media coverage
suggests that institutional investors are at least partially
subject to limited attention. Previous research has also
demonstrated a “media bias” toward local investors’
and local firms’ interests (Mullainathan and Shleifer
[2005], Gentzkow and Shapiro [2006], Engelberg and
Parsons [2011], Gurun and Butler [2012]). Engelberg
and Parsons investigated the behavior of traders in 19
mutually exclusive trading regions, where these traders
are subjected to different media coverage of the same
news event. They document that the local media cover-
age of a news event is strongly related to local trading
activities. Gurun and Butler provided evidence that
local news provides favorable news reports to local
companies. The local positive slant is related to firms’
local media advertising expenditures.
Investors’ psychological biases in their information
processing and financial decision making have been
found to be highly related to their emotions. Recent
finance literature has provided empirical evidence on
4 different investor emotions (fear, gloom, joy, stress)
and their effects on financial markets. The most com-
monly documented emotion in existing finance
research is fear. Financial crises often inject consider-
able fear into future market movement, and that effect
usually slows down the financial recovery process or
even creates more turmoil in the market. The implied
volatility indices are often used as proxies for market
fear. High levels of implied volatility indicate that
investors are fearful of market prospects; therefore,
previous research has adopted implied volatility indi-
ces (including the Implied Volatility Index [VIX],
among others) to forecast forward-looking stock
returns and other financial security returns (Rubbaniy,

Asmerom, Rizvi, and Naqvi [2014], Esqueda, Luo, and
Jackson [2015]). Da, Engelberg, and Gao [2014] estab-
lish a daily fear index–based internet search index
with data from millions of households. They found
that the Internet search–based fear index can predict
asset prices, volatility, and mutual fund flows.
The other commonly documented emotions in recent
finance literature are gloom, joy, and stress. Investors
tend to lose their faith and hope in the stock market
after experiencing a long-lasting recession. Uhl [2018]
explained asymmetric reactions in implied volatility of
S&P 500 Index options across the term structure based
on news sentiment. Using put options as a proxy for
fear and call options as a proxy for greed, Uhl found
that the reaction is more pronounced for fear than for
greed, and this asymmetry is more pronounced when
the time to maturity of the option is shorter.
Additionally, Smales [2014] found that the changes
in implied volatility are larger following the release of
negative news items. The gloomy stage of the market
downturn may take years to recover because investors
are more sensitive to the fragile market (Lauricella
[2011]). Azzi and Bird [2005] found that market
boom or gloom states affect analysts’ recommendation
tendency, where analysts’ recommendations favor high
momentum growth stocks more during boom years
than during gloom years.
On the other hand, a recent article shows that
investments made in hotels during booms underper-
form for a few years (Povel, Sertsios, Kosova, and
Kumar [2016]). Researchers speculate that people’s
happiness is highly correlated with their income,
although the causal relationship between the 2 may be
bilateral (Tella, MacCulloch, and Oswald [2003]).
Finance researchers often regard sunshine and tem-
perature as indicators of investors’ joy or happiness.
Hirshleifer and Shumway [2003] confirmed that the
stock market performs on sunny days than on cloudy
days. This documented “sunlight effect” is attributed
to investors’ joyful mood because of the sunshine
rather than to long-term value growth. Karabulut
[2013] adopted Facebook’s GNH as a measure of
investor happiness manifested on social media. He
found that “an increase of one standard deviation in
GNH has associated with an increase of 11:23 basis
points in market returns over the next day.”
Engelberg and Parsons [2016] revealed that daily stock
return is inversely linked to stress-induced psycho-
logical illness. Preis, Kenett, Stanley, Helbing, and
Ben-Jacob [2012] proposed that average correlation
among the stocks listed on Dow Jones Industrial
Average increases with the increase in market stress,
JOURNAL OF BEHAVIORAL FINANCE 5
so the benefits of portfolio diversification diminish
during a stressful market state. Research has also sug-
gested that investors’ herding behavior increases with
stress in the stock market and that herding toward the
market portfolio often occurs during periods of high
market stress (Hwang and Salmon [2004], Blasco,
Corredor, and Ferreruela [2012]).
Despite the recent research success on a single
dimension of investor emotion, there remains a need
for a complete empirical model for investor emotion-
based asset pricing. In this research, we aim to provide
a range of tests on the robustness of different investor
emotion models based on the multiple dimensions of
investor emotion indices and to suggest a complete
investor emotion-associated asset pricing model.
Data and methodology
We obtain the data for our analysis from TRMI. The
TRMI are updated every minute and derived from a
collection of premium news, global internet news
coverage, and a broad group of social media outlets
(Peterson [2013], Huang, Lehkonen, Pukthuanthon,
and Zhou [2018]). The TRMI utilizes contents derived
both from news and social media to reflect the senti-
ment of both professional and individual investors.
For the first category, MarketPsych sources of text
include The New York Times, The Wall Street Journal,
Financial Times, Seeking Alpha, and dozens of more
sources available to professional investors. Less formal
news sources are obtained from Yahoo! and Google
News. For the second category, TRMI utilizes over 2
million social media sites, including StockTwits,
Yahoo! Finance, Blogger, chat rooms and other sour-
ces. MarketPsych employs lexical analysis to extract
sentiment indices by scrapping all sources minutely,
which includes over 2 million news articles and posts
every day. Each sentiment index is a combination of
news and social media content, and each minute value
is a simple average of the past 24 hr (1,440 min) of
information (Peterson [2013]). Thus, the TRMI repre-
sents an unmatched collection of premium news and
a broad range of social media sources.1
Emotion sentiment variables
For our analysis, we choose 4 TRMI emotional and 1
traditional sentiment measures. These measures are
fear, joy, gloom, volume, and stress. Each sentiment
index (except for volume) is a 24-hr rolling average
score of references in the news and social media to
that particular measure. All measures range from 0 to
6 J. GRIFFITH ET AL.

Table 1. Descriptive statistics and correlations.

cMP_FEAR cMP_GLOOM cMP_JOY cMP_STRESS LogVolume Spr
Panel A
N 2,450 2,450 2,450 2,450 2,450 2,450
Mean 0.0000799 0.0005890 0.0001152 0.0004651 19.37287 0.01851
Std Dev 0.00123 0.00379 0.00153 0.00443 0.82122 1.22663
Sum 0.19574 1.44828 0.28230 1.13960 47464 45.34929
Minimum –0.00492 –0.01617 –0.00681 –0.01807 17.02138 –9.45954
Maximum 0.00775 0.02309 0.00889 0.02102 20.72292 6.70488
Panel B
cMP_FEAR 1.00000

cMP_GLOOM 0.16254  1.00000

(<.0001)
cMP_JOY –0.10137  –0.17455  1.00000
(<.0001) (<.0001)
cMP_STRESS 0.19786  0.25235  –0.23859  1.00000
(<.0001) (<.0001) (<.0001)
LogVolume –0.00323  –0.02987  –0.00828  –0.02943  1.00000
(0.8729) (0.1394) (0.6822) (0.1453)
Spr –0.12226  –0.09745  0.11590  –0.13535  0.03661  1.00000
(<.0001) (<.0001) (<.0001) (<.0001) (0.0700)
Note. This table provides summary statistics (Panel A) and correlation coefficients (Panel B) for the full sample of 2450 daily observations from January 1,
1998, to December 31, 2014. The emotional indicator data in the table come from the Thomson Reuters MarketPsych Indices (TRMI), and the stock
return data in the table come from the Global Financial Database. Among the variables, cMP_FEAR is daily change in market-level fear, cMP_JOY is
daily change in market-level joy, cMP_GLOOM is daily change in market-level gloom, cMP_STRESS is daily change in market-level stress, Log Volume is
the log of the daily NYSE trading volume, and Spr is the log of the daily S&P 500 index returns. In Panel B,  denotes significance at the 1% level.

1, except for volume. Our data sets are daily data
from January 1, 1998, through December 31, 2014.
We also use log returns on the S&P 500 index as the
measure of market return, which is obtained from the
Global Financial Database.
Table 1 provides descriptive statistics and a correl-
ation matrix for the variables (emotion sentiment
changes and market return) used in this study. The
market return (spr) is positively correlated with
changes in joy and negatively correlated with changes
in fear, gloom, and stress.
We plot the time series of S&P 500 return and the
TRMI sentiment variables in Figures 1–5. By visual
inspection of the graph, we can see that the S&P 500
return and negative sentiments (fear, gloom, and
stress) move in opposite directions while the S&P 500
return and the positive sentiment (joy) moves in the
same direction. Before the great recession
(2008–2009), negative sentiments (fear, gloom, and
stress) started to rise and then fell after the market
recovered. While our measure of positive sentiment,
joy (Figure 3), follows a similar pattern to the S&P
500 return (Figure 1). Taken together, we conclude
that overall the evidence is supportive of the notion
that the TRMI indexes capture investor sentiments.
Vector autoregressive analysis of sentiment
and returns
The predictive power of sentiment has always been a
source of great interest to researchers. Brown and
Cliff [2004, 2005] examined the usefulness of senti-
ment in predicting stock returns. They found that
stock returns the Granger-cause sentiment, while
sentiment is not helpful in predicting stock returns.
Verma, Baklaci, and Soydemir [2008], on the other
hand, found some predictive power of sentiment
when they decompose sentiment into rational and
irrational components. Thus, the extent of the use-
fulness of sentiment in predicting returns beyond
the informational content of past returns has been
controversial. In this study, we investigate the
extent of how useful the informational content of
our sentiment measures in predicting stock returns
using daily data for different measures of emo-
tional sentiment.
We employ a vector autoregressive (VAR) model in
which market returns and different measures of senti-
ment act as a system with the goal of identifying caus-
ality between sentiment and market similarly to
Brown and Cliff [2004]. The model we propose is
X
5
Yt ¼ k þ wYti þ E t (1)
i¼1
where Yt is a vector that contains market returns and
different measures of sentiment (fear, joy, gloom,
stress, and volume).2 We estimate VAR models
for periods up to 5 days long, based on selection met-
rics such as Akaike information criterion and
Bayesian information criterion, to investigate the
causal structures and forecasting capabilities of
 JOURNAL OF BEHAVIORAL FINANCE 7

Series Values for spr

0
spr

-5

-1 0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Date

Figure 1. S&P 500 Daily Returns 1998–2014.

Figure 2. TRMI Fear Index 1998–2014.

Series Values for MP_JOY

0 .0 2 5

0 .0 2 0
MP_JOY

0 .0 1 5

0 .0 1 0

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Date

Figure 3. TRMI Joy Index 1998–2014.

8 J. GRIFFITH ET AL.

Series Values for MP_GLOOM

0 .0 7

0 .0 6
MP_GLOOM

0 .0 5

0 .0 4

0 .0 3

0 .0 2
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Date

Figure 4. TRMI Gloom Index 1998–2014.

Series Values for MP_STRESS

0 .1 0
MP_STRESS

0 .0 8

0 .0 6

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Date

Figure 5. TRMI Stress Index 1998–2014.

These figures provide impulse responses of the S&P 500 stock returns and investor emotions to its 5-day lag. The sample period
comprised 2,453 trading days from January 1, 1998, to December 31, 2014. The emotional indicator data in the table come from
the Thomson Reuters MarketPsych Indices (TRMI), and the stock return data in the table come from the Global Financial Database.
Among the variables, MP_FEAR is the daily market-level fear, MP_JOY is the daily market-level joy, MP_GLOOM is the daily mar-
ket-level gloom, MP_STRESS is the daily market-level stress, and Spr is the daily log returns of the S&P 500.

sentiment measures. We estimate the models using
both the levels of and changes in the sentiment
measure. Brown and Cliff [2004] argued that this is
appropriate “since it not easily determined which
specification should reveal the primary effects of
sentiment.” They argued that from a theoretical
standpoint, both levels of and changes in sentiment
may affect stock returns. Uhl [2014] utilized VAR
models with monthly frequency and found positive
and negative Reuters sentiment have an impact on
stock returns. The author found negative Reuters sen-
timent seems to be more persistent than positive
Reuters sentiment.
Sentiment measures and stock return volatility
The effect of sentiment on stock returns and volatility
is not very clear. Some researchers have found that
sentiment affects both the mean and variance of stock
returns (Lee et al. [2002], Verma and Verma [2007]).
However, Wang et al. [2006] found that the forecast-
ing power of sentiment for volatility disappears if
lagged returns are included in the models. We utilize
a TGARCH model to investigate the effect of senti-
ment measures on stock mean return and volatility.
The TGARCH model incorporates the leverage effect
since it has a certain term for negative return
 JOURNAL OF BEHAVIORAL FINANCE 9

Figure 6. Impulse response function.

innovations (Zakoian [1994]). We employ the follow- Ht ¼ x þ ðw þ b; 1fet –1<0g Þe t–1

2
þ c1 Ht–1 (3)
ing TGARCH (1,1) model to investigate the effects of
sentiment measures on market returns volatility: In the previous TGARCH model, the coefficient to
the lagged square error in a GARCH model is allowed
RS&P; t ¼ a0 þ a1 RS&P; t–1 þ a2 Feart þ a3 Joyt to attain different values, depending on the sign of the
þ a4 Gloomt þ a5 Stresst þ et (2) lagged error term. In this TGARCH model, the
10 J. GRIFFITH ET AL.

indicator function is 1 if et–1 < 0 and 0 otherwise. In
this model, for positive lagged errors, the coefficient is
just the w parameter, while the coefficient for negative
error terms is w þ b.
Empirical results
Table 2, Panel A, presents the estimated daily parame-
ters for the VAR (5) model with 5 sentiment-level
measures (fear, joy, gloom, stress, and volume). Out
of the 5 measures of sentiment, only fear is significant
and capable of predicting market returns in a period
up to 5 days. The coefficient for fear, where the mar-
ket return is the dependent variable, is significant at
lag 2 and has a t statistic of 1.78, which is statistically
significant at the 10% level. The coefficient for fear at
lag 4 has a t statistic of 1.72, which is also statistically
significant at the 10% level. The coefficient for fear at
lag 5 has a t statistic of –2.08 and is significant at the
5% level. Turning our attention to fear as the depend-
ent variable, we find that lagged values of fear and
market return influence this sentiment measure. The
market return at lag 1 has a t statistic of –10.22 and is
statistically significant at the 1% level. The market
return also influences fear at a lag of 2 days, has a t
statistic of –1.73 and is statistically significant at the
10% level.
The sentiment measure joy is influenced by the lag
of market return up to 2 days and the other measures
of sentiment. It is influenced by stress for up to 1 day,
gloom for up to 3 days, and fear for up to 4 days. Joy
is related to its past values for up to 5 days. The senti-
ment measure stress is influenced by the previous
day’s market return, gloom for up to 4 days, Volume
for up to 3 days, and gloom for up to 4 days. Volume
is influenced by the market return for up to 2 days
and by fear and stress for up to 5 days.
Table 2, Panel B, shows the results of estimates of
the system using the change in sentiment measures.
Market return is affected by fear (cMP_FEAR) at lags
of 2 and 4 days and statistically significant for both
lags at the 5% level. Market return is also influenced
by the sentiment measure of stress (cMP_STRESS) at
a lag of 1 day at the 10% level. The other measures of
sentiment (joy, gloom, and volume) do not affect
market return. The sentiment measure of fear is influ-
enced by a market return at lag 1 and is statistically
significant at the 1% level. The results for other meas-
ures of sentiment resemble those reported in Table 2
(i.e., sentiment does not affect market return but is
influenced by market return).
There is strong evidence that the relationship
between the change in fear and market return is bidir-
ectional. Fear affects market returns up to 4 lags, and
in turn, it is influenced by the market return at a 1-
day lag. This finding is in contrast with that of Brown
and Cliff [2004], who reported that market returns
influence investor sentiment, but “The effects of
investor sentiment on subsequent returns are quite
small.” It is quite clear to us that the choice of senti-
ment affects this relationship. Fear appears to have a
substantial influence on future market returns, while
other measures of investor sentiment (joy, gloom, and
stress) have little or no effect on future returns. Our
results are also consistent with Tetlock’s [2007] find-
ings on the sentiment theory, which predicts that the
results will be reversed in the short horizon. Also con-
sistent with Tetlock’s findings is our finding that high
levels of fear and gloom predict downward pressure
on market prices, and high values of these pessimism
sentiments predict high trading volume and serve as a
proxy for investor sentiment trading.
Overall, some of our results surprisingly conflict
with those of previous studies, as we find that some
measures of sentiment have strong predictive power.
Out of the 4 measures of sentiment (fear, joy, gloom,
and stress), fear is significant at lags of up to 4–5
days. This significance indicates that fear causes

Table 2. AR estimates of the relation between stock returns and emotions.

Panel A I. Predicting S&P 500 returns using changes in sentiment measures.
S&P 500 Returns
Emotional Indicators MP_FEAR MP_GLOOM MP_JOY MP_STRESS LogVolume Spr
Investor Emotionst1 7.24535 –2.05990 11.98361 –6.28205 –0.07598 –0.01406
(0.32) (–0.29) (0.68) (–0.99) (–0.67) (–0.68)
Investor Emotionst2 42.76968 –8.76807 –4.70875 6.04609 0.09381 0.02229
(0.0746) (0.2589) (0.8051) (0.3764) (0.4331) (0.2979)
Investor Emotionst3 –28.43230 13.14652 24.54766 6.46966 0.05688 –0.00873
(0.2356) (0.0882) (0.1971) (0.3424) (0.6391) (0.6828)
Investor Emotionst4 41.18187 –1.14285 –3.56170 –6.19283 0.05689 0.03772
(0.0854) (0.8831) (0.8512) (0.3659) (0.6379) (0.0755)
Investor Emotionst5 –46.63145 –8.99388 –7.61670 –8.62348 –0.08393 0.03782
(0.0378) (0.2079) (0.6628) (0.1717) (0.4676) (0.0722)
 JOURNAL OF BEHAVIORAL FINANCE 11

II. Feedback effects of S&P 500 returns on sentiment measures.

Emotional Indicators MP_FEAR MP_GLOOM MP_JOY MP_STRESS LogVolume
S&P 500 Returnst1 –0.00020 –0.00045 0.00011 –0.00039 –0.02236
(0.0001) (0.0001) (0.0001) (0.0001) (0.0001)
S&P 500 Returnst2 –0.00003 –0.00000 –0.00004 0.00001 –0.00762
(0.0845) (0.9788) (0.0940) (0.8650) (0.0462)
S&P 500 Returnst3 –0.00001 0.00002 –0.00002 0.00004 –0.00332
(0.7684) (0.7934) (0.4135) (0.5672) (0.3841)
S&P 500 Returnst4 0.00003 –0.00003 –0.00001 –0.00000 0.00395
(0.1611) (0.6012) (0.6913) (0.9645) (0.2973)
S&P 500 Returnst5 0.00002 –0.00001 –0.00002 0.00010 0.00322
(0.4271) (0.8523) (0.5416) (0.1805) (0.3910)

Panel B III. Predicting S&P 500 returns using changes in sentiment measures.
S&P 500 Returns
Emotional Indicators cMP_FEAR cMP_GLOOM cMP_JOY cMP_STRESS LogVolume Spr
Investor Emotionst1 –3.40856 3.74980 12.73912 –11.57809 –0.10443 –0.01365
(0.8765) (0.5950) (0.4704) (0.0651) (0.10443) (0.5109)
Investor Emotionst2 49.19478 –6.14296 10.91673 –8.07179 0.05331 0.01800
(0.0321) (0.3949) (0.5495) (0.2161) (0.6547) (0.3989)
Investor Emotionst3 9.18601 8.74953 15.36164 1.05858 0.04567 –0.01087
(0.6903) (0.2286) (0.4007) (0.8720) (0.7050) (0.6105)
Investor Emotionst4 45.59842 –3.08257 19.80056 3.88275 0.02626 0.03771
(0.0470) (0.6703) (0.2767) (0.5511) (0.8268) (0.0764)
Investor Emotionst5 –17.26032 –7.26326 21.48029 –8.15370 –0.12058 0.03096
(0.4283) (0.3032) (0.2201) (0.1925) (0.2885) (0.1436)

IV. Feedback effects of S&P 500 Returns on changes in sentiment measures.

Emotional Indicators cMP_FEAR cMP_GLOOM cMP_JOY cMP_STRESS LogVolume
S&P 500 Returnst1 –0.00017 –0.00035 0.00011 –0.00033 –0.02440
(0.0001) (0.0001) (0.0001) (0.0001) (0.0001)
S&P 500 Returnst2 –0.00002 0.00001 0.00001 0.00001 –0.00903
(0.3587) (0.9121) (0.7545) (0.8528) (0.0183)
S&P 500 Returnst3 0.00000 0.00002 –0.00000 0.00001 –0.00485
(0.9468) (0.7941) (0.9678) (0.8462) (0.2046)
S&P 500 Returnst4 –0.00002 –0.00007 0.00000 –0.00012 0.00269
(0.4539) (0.2875) (0.9155) (0.1153) (0.4801)
S&P 500 Returnst5 –0.00002 0.00002 0.00001 0.00001 0.00258
(0.2825) (0.6996) (0.8181) (0.8901) (0.4965)
Note. This table provides vector autoregressive (VAR) model parameter estimates of the S&P 500 stock returns on investor sentiment
measures to its 5-day lag. The sample period comprised 2450 trading days from January 1, 1998, to December 31, 2014. The emo-
tional indicator data in the table come from the Thomson Reuters MarketPsych Indices (TRMI), and the stock return data in the table
come from Global Finance database. Among the variables, MP_FEAR is daily market-level fear, MP_JOY is daily market-level joy,
MP_GLOOM is daily market-level gloom, MP_STRESS is daily market-level stress, LogVolume is the log of the daily NYSE trading vol-
ume, and Spr is the log of the daily S&P 500 index returns, cMP_FEAR is the daily change in market-level fear, cMP_JOY is the daily
change in market-level joy, cMP_GLOOM is the daily change in market-level gloom, cMP_STRESS is the daily change in market-level
stress. In the table,  denotes significance at the 10% level,  denotes significance at the 5% level, and  denotes significance at
the 1% level.

returns and should be exploitable to predict future
market returns for up to 5 days. This effect is bidirec-
tional and runs from this sentiment measure to stock
returns and from the returns to this sentiment meas-
ure (fear). In the next section, we investigate the
effects of sentiment measures on mean return
and volatility.
Investor sentiment and stock return volatility
Table 3 presents the estimates of TGARCH (1,1),
Models 2 and 3. The model fits very well, and all the
coefficients for the model are highly significant.
Among the sentiment measures in the model,
cMp_Fear has the largest impact, with a coefficient of
–74.9378, which is statistically significant at the 1%
level. The negative sign indicates that changes in fear
are associated with drops in the market return.
cMP_Joy has the second largest coefficient of 41.6085,
which is also statistically significant at the 1% level.
The coefficient has a positive sign, implying that
increases in joy are associated with increases in the
market return. The gloom and stress coefficients have
the correct sign (negative) and are statistically signifi-
cant at the 1% level.
The coefficients for conditional volatility are all
highly statistically significant. The asymmetric param-
eters are positive and significant. The results support
12 J. GRIFFITH ET AL.

strong leverage effects, where negative shocks have a

the variables, cMP_FEAR is the daily change in market-level fear, cMP_GLOOM is the daily change in market-level gloom, cMP_JOY is the daily change in market-level joy, cMP_STRESS is the daily change in mar-
7075.60397

7078.27606

7061.93633

7016.70712

December 31, 2014. The emotional indicator data in the table come from the Thomson Reuters MarketPsych Indices (TRMI), and the stock return data in the table come from Global Finance database. Among
Note. This table provides threshold GARCH (TGARCH) Estimates of the S&P 500 stock returns on different models of the investor emotions. The sample period comprised 2450 trading days from January 1, 1998, to
7068.1374
AIC
larger effect on the volatility of S&P 500 returns
(leverage effects). When et–1 is negative, the total
effects are given by (w þ b) e2t–1. Thus, one would
0.0197 expect b to be positive for bad news and to have
0.0137

0.0156

0.0208

0.0422
R2

larger impacts. As w > 0, this implies that conditional

volatility increases more because of negative shocks
than because of positive shocks of equal size. The
0.8800

0.8793

0.8764

0.8780

0.8731
TGARCH1

(81.35)

(78.84)

(79.18)

(78.91)

(73.98)
coefficients for TARCH are statistically significant and
imply that negative shocks to the market return have
almost 3 times the impact on conditional volatility as
0.1211

0.1214

0.1212

0.1205

0.1187

positive shocks.
TARCHB1

(7.92)

(8.03)

(7.75)

(8.02)

(7.48)

ket-level stress, and Spr is the daily log returns of the S&P 500. In the table,  denotes significance at the 5% level and  denotes significance at the 1% level.
In summary, our TGARCH (1,1) model with emo-
tion measures fits the data very well. We find that the
fear among investors has a major and lasting effect on
0.0358

0.0360

0.0377

0.0375

0.0422
TARCHA1

the market return and conditional volatility. The find-

(3.20)

(3.17)

(3.21)

(3.30)

(3.37)

ings in this section regarding market return and con-

ditional volatility confirm our findings from the VAR
(5) model that fear in the marketplace causes large
0.0285

0.0289

0.0303

0.0288

0.0296
TARCHA0

volatility that lasts up to 4 days. This sentiment meas-

(5.80)

(5.76)

(5.92)

(5.84)

(5.67)

ure could be used to predict market return

and volatility.
–0.0534

–0.0448

–0.0636
Lagged spr

–0.0412

–0.0436
(–2.44)

(–2.05)

(–1.89)

(–2.03)

(–2.95)

Robustness check
To confirm the robustness of our main finding in the
previous sections that investor fear affects market
–26.6205

–17.2930

return and volatility, we include an alternative meas-

cSTRESS

(–6.58)

(–4.05)

ure of fear (VIX) known as the “fear index” and

University of Michigan Consumer Sentiment Index
(UMCSI) in our TGARCH model. We are interested
in knowing whether our results are sensitive to the
62.1722

43.0263
(5.45)

(3.61)

inclusion of these variable in our models. The UMCSI

cJOY

is available on monthly basis. Thus, when we include

UMCSI in the model, we convert the data from daily
to monthly.
–27.2520

–17.8333
Table 3. Stock returns volatility and investors’ emotions.
cGLOOM

The VIX is calculated by CBOE and represents the

(–5.64)

(–3.55)

implied volatility of an at-the-money option (both

calls and puts) on S&P 500 stock index option prices
with more than 23 days and less than 37 days to
–95.2792

–74.9378

expiration. VIX is considered the world’s premier bar-

(–6.73)

(–5.19)
cFEAR

ometer of investor sentiment and market volatility.

We estimate the following TGARCH (1,1) model:
RS&P; t ¼ a0 þ a1 RS&P t–1 þ a2 VIXt þ a3 Feart
0.0549

0.0503

0.0589

þ a4 UMCSIt þ et
0.0457
Intercept

(4)
0.0322
(2.43)

(2.89)

(1.69)

(2.67)

(3.09)

Ht ¼ x þ ðw þ b; 1fet –1<0g Þe t–1

2
þ c1 Ht–1 (5)
where VIX is the CBOE Volatility Index, fear is the
Emotions’ effect

change in the fear sentiment, and UMCSI is the

Gloom effect

Stress effect

University of Michigan Consumer Sentiment Index.

Fear effect

Joy effect

Multiple

Table 4, Panel A, reports the estimates for the

TGARCH (1,1) model of the previous specification on
 JOURNAL OF BEHAVIORAL FINANCE 13

Table 4. Robustness check with VIX and UMCSI

Panel A – Daily Data
Intercept cFEAR VIX UMCSI Lagged spr TARCHA0 TARCHA1 TARCHB1 TGARCH1 R2 AIC
Multiple 0.3531 –96.0859 –0.0175 –0.0661 0.0180 0.0521 0.0927 0.8925 0.0485 7033.83364
Emotions’ effect (6.58) (–6.90) (–6.95) (–3.09) (3.94) (4.75) (6.73) (82.07)

Panel B – Monthly Data

Multiple –390.0617 –95.3009 –0.0178 0.0827 –0.5682 0.0875 0.2715 –0.0867 0.5723 0.3791 397.142291
Emotions’ effect (–4.21) (–2.91) (–4.21) (0.93) (–13.01) (1.52) (2.29) (–.58) (3.20)
Note. This table provides Threshold GARCH (TGARCH) Estimates of the S&P 500 stock returns on different models of the investor emotions. The sample
period comprised 2450 trading days from January 1, 1998, to December 31, 2014. The emotional indicator data in the table come from the Thomson
Reuters MarketPsych Indices (TRMI), and the stock return data in the table come from Global Finance database. Among the variables, cMP_FEAR is the
daily change in market-level fear, VIX is CBOE S&P 500 Volatility Index, UMCSI is the University of Michigan Consumer Sentiment Index and Spr is the
daily log returns of the S&P 500. AIC ¼ Akaike information criterion. In the table,  denotes significance at the 5% level and  denotes significance
at the 1% level.

daily data. The coefficients of interest are a2, and a3
in (4). Both coefficients are statistically significant at
the 1% level. The inclusion of the “fear index” (VIX)
in our model does not change the significance of the
sentiment measure of fear. The magnitude of the coef-
ficient for this negative sentiment increases by almost
39%. This suggests that, if anything, the sentiment
measure of fear used in this article has a major effect
on the return and conditional volatility of the market.
Table 4, Panel B, reports the coefficients for our
TGARCH (1,1) model when UMCSI is included in
the model. Among the sentiment indexes, only
UMSCI is insignificant. Our measure investor’s fear
appears to withstand these robustness tests very well.
Conclusions
This study explores the interaction between media
content and market returns and volatility. We utilize
propriety investor sentiment measures developed by
TRMI. The data are from a commercial-strength com-
prehensive textual analysis that provides 24-hr rolling
average scores of total references in the news and
social media by counting overall positive references
net of negative references. We select 4 measures of
investor sentiment that reflect both pessimism and
optimism of small investors. These measures are fear,
gloom, joy, and stress. Our objective is twofold. First,
we examine the ability of these sentiment measures to
predict market returns. For this purpose, we use
dynamic VAR models. Second, we are interested in
exploring the effects of these sentiment measures on
market return and volatility. For this purpose, we util-
ize TGARCH models.
We explore the ability of sentiment measures to
predict both the level of and change in market return,
as suggested by Brown and Cliff [2004]. In our VAR
models, we use 5 trading days (a calendar week) and
find, in contrast to previous studies, that some meas-
ures of sentiment have strong predictive power. Of
the 4 measures of sentiment (fear, joy, gloom, and
stress), fear is significant at lags of up to 4–5 days.
This indicates that fear Granger causes returns and
should be exploitable to predict future market returns
up to 5 days. This effect is bidirectional and runs
from this sentiment measure to stock returns for up
to 5 days and from returns to fear for up to 2 days.
The sentiment measure of stress has a small effect on
the market return for a 1-day lag. The other 2 senti-
ment measures, gloom and joy, seem to play no role
in predicting market returns.
To investigate the relations between sentiment
measures and market return and volatility, we employ
TGARCH (1,1) models. We find that our TGARCH
(1,1) model with emotion measures fits the data very
well. We find that fear among investors has a major
and lasting effect on market returns and conditional
volatility. The findings regarding market returns and
conditional volatility confirm our findings from the
VAR (5) model that fear in the marketplace causes
large volatility that lasts up to 4 days. This sentiment
measure could be used to predict stock market returns
and volatility.
To check the robustness of our results, we use an
alternative measure of fear known as the “fear index”
(VIX). We find that the inclusion of this fear index in
our model does not change the significance of the
sentiment measure of fear. The magnitude of the coef-
ficient for this negative sentiment increases by almost
39%. This suggests that, if anything, the sentiment
measure of fear used in this article has a major effect
on the return and conditional volatility of the market.
Notes
1. TRMI’s text analytic techniques are designed to score
business-specific language for quantitative financial
applications. This is important because, as shown by
Loughran and McDonald [2011], word lists that are not
unique to finance might not correctly reflect tone in the
14 J. GRIFFITH ET AL.
financial context. TRMI’s entire content set includes
millions of articles and posts each day from various
sources such as news wires, Internet news sources, and
social media. Due to the wide variety of content
sources, cares have to be given when interpreting words
or symbols that express emotions. For example, in
social media someone may use an acronym such as
“LOL” that is unlikely to be used in a formal news
press release. To account for these differences, TRMI
uses differentiated models for news, social media
forums, tweets, Securities and Exchange Commission
filings, as well as earnings conference call transcripts.
2. We include volume in the model because it is one of
the oldest measures of sentiment used by practitioners.
There is an old adage on Wall Street that “it takes
volume to move prices.”
Acknowledgments
The authors wish to thank Richard Peterson, Managing
Director at MarketPsych, and Elijah DePalma, Senior
Quantitative Research Analyst at Thomson Reuters for pro-
viding the authors with the proprietary TRMI data.
ORCID
John Griffith https://orcid.org/0000-0003-4610-7463
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