Investor Sentiment and Market Movements: A Granger Causality Perspective

ArXiv ID: 2510.15915 “View on arXiv”

Authors: Tamoghna Mukherjee

Abstract

The stock market is heavily influenced by investor sentiment, which can drive buying or selling behavior. Sentiment analysis helps in gauging the overall sentiment of market participants towards a particular stock or the market as a whole. Positive sentiment often leads to increased buying activity and vice versa. Granger causality can be applied to ascertain whether changes in sentiment precede changes in stock prices.The study is focused on this aspect and tries to understand the relationship between close price index and sentiment score with the help of Granger causality inference. The study finds a positive response through hypothesis testing.

Keywords: Granger causality, Sentiment analysis, Investor sentiment, Hypothesis testing, Equities (Stock Market Index)

Complexity vs Empirical Score

• Math Complexity: 3.0/10
• Empirical Rigor: 5.0/10
• Quadrant: Street Traders
• Why: The paper employs Granger causality, a standard econometric method with moderate statistical rigor, but lacks advanced mathematical derivations or complex modeling. It demonstrates empirical rigor by applying the test to 5 years of real market data and reporting specific p-values for different lags, making it more practical than theoretical.

  flowchart TD
    A["Research Goal: Is there a Granger causal relationship<br>between investor sentiment and stock market movements?"]
    B["Data & Inputs: Stock Market Index (Close Prices)<br>Investor Sentiment Score"]
    C["Methodology: Preprocessing & Time Series Alignment<br>Sentiment Analysis & Granger Causality Test"]
    D["Computational Process: Construct Vector Autoregression Models<br>Perform F-test & Calculate Lag p-values"]
    E["Outcome: Rejection of Null Hypothesis<br>Significant Granger Causality Found"]
    F["Key Findings: Investor sentiment positively influences<br>future market movements. Sentiment precedes price action."]

    A --> B
    B --> C
    C --> D
    D --> E
    E --> F