Market sentiment indicators: A comparative study of PCR and VIX impact on the S&P 500

Abstract

This study explores the influence of non-economic factors, particularly investor sentiment, on asset price movements, with a focus on the S&P 500 index. Two key sentiment indicators are examined: the Put-Call Ratio (PCR) and the Volatility Index (VIX). Utilizing a random-walk regression model, the research aims to determine which of these indicators better explains the residual movements of the S&P 500 index. The findings reveal that the PCR demonstrates a stronger correlation and greater explanatory power compared to the VIX, as evidenced by higher adjusted R-squared values and more significant t-statistics.