Bull or bear? For the first time New Zealand investors can quantify of how sentiment is shaping local financial markets.
Launched by AUT’s Auckland Centre for Financial Research (ACFR), the FINSENT Sentiment Index measures the feeling or tone of a market, commonly known as market sentiment.
Financial theory argues markets are generally efficient, meaning investors are making rational decisions and incorporating all available information into the pricing of financial assets, but in reality it’s not the case, says ACFR financial research officer, Alex Medland-Slater.
“Investors are irrational at times, which affects the movement of markets. You generally can’t measure how a market is ‘feeling’ unless you ask investors, quantify the results and then combine this information into an index. This is what the ACFR is doing,” says Medland-Slater.
“We’re asking investors what their feelings are. We’re then using the answers to create an index to give us a sense of an overall feeling or tone of how people are thinking about a market.
“We do this every week, the advantage being any trends, correlations and patterns can become clear.”
The forward-looking measure will gauge sentiment over one month and six months for the NZX 50, ASX 200, S&P 500, and New Zealand foreign exchange rates with Australia and the United States.
The survey is free to sign up and participate. The advantage is a wide range of views can be captured, from mum and dad retail investors to large institutional investors, as each act and trade differently within financial markets.
Research suggests sentiment measures are a leading indicator of stock returns within a six month horizon, can be a contrarian indicator signalling overbought markets and are useful in asset pricing models as an additional risk factor.
Industry participants can register to take part in the FINSENT Sentiment Index survey and receive advance copies of results prior to market release.