1. ¹is Chairman and Associate Professor of Finance in the Accounting and Finance Department at UMASS-Boston. He is also Director of the College of Management's Finance Services Forum. He has published in leading journals in economics and finance and has presented his work at various conferences. He is the recipient of the Dean's Award for Distinguished Research and several awards for teaching excellence in the College of Management.
2. ²is an assistant professor of accounting in the Accounting and Finance Department at UMASS-Boston. She is a research associate with the College of Management's Financial Services Forum and has received a conference award for Best Paper by a New Faculty Member. She is also a certified public accountant and worked for several years as an auditor and tax specialist at Ernst and Young.

Correspondence: Anne Leah Jones, Accounting and Finance Department, College of Management, University of Massachusetts, Boston, MA, USA, E-mail: anne.jones@umb.edu

Received 23 February 2006.

Abstract

Recently, investor sentiment has become the focus of many studies on asset pricing. Research has demonstrated that changes in investor sentiment may trigger changes in asset prices, and that investor sentiment may be an important component of the market pricing process. Some authors suggest that shifts in investor sentiment may in some instances better explain short-term movement in asset prices than any other set of fundamental factors. This paper develops an Equity Market Sentiment Index from publicly available data, and then demonstrates how this measure can be used in a stock market setting by studying the price movements of a group of firms which represent a stock market index. News events that affect the underlying market studied are quickly captured by changes in this measure of investor sentiment, and the sentiment measure is capable of explaining a significant proportion of the changes in the stock market index.