This paper introduces the concept of divergence of sentiment to the behavioral finance literature. We measure the distance between people with positive and negative sentiment on a daily basis for 20 countries by using data from status updates on Facebook. The prediction is that a higher divergence of sentiment leads to more diverging views on prospects and risks, and thus to more diverging views on the value of a stock. In line with this prediction, divergence of sentiment is positively related to trading volume. We further predict and find a positive relation between divergence of sentiment and stock price volatility. The observed relations are stronger when individual investors are more likely to trade. We compare the effect of our country-specific measures to a global measure of divergence of sentiment. We find that the separate effects of country-specific and global divergence measures depend on a country's level of market integration.

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Keywords Disagreement models, Divergence of opinion, Market integration, Sentiment, Small investors
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Journal Journal of Banking & Finance
Siganos, A, Vagenas-Nanos, E, & Verwijmeren, P. (2017). Divergence of sentiment and stock market trading. Journal of Banking & Finance, 78, 130–141. doi:10.1016/j.jbankfin.2017.02.005