Investor sentiment aligned: : A powerful predictor of stock returns

By Dashan Huang, Fuwei Jiang, Jun Tu, Guofu Zhou. 2015

924 citations recorded by the source corpus.

We propose a new investor sentiment index that is aligned with the purpose of predicting the aggregate stock market. By eliminating a common noise component in sentiment proxies, the new index has much greater predictive power than existing sentiment indices have both in and out of sample, and the predictability becomes both statistically and economically significant. In addition, it outperforms well-recognized macroeconomic variables and can also predict cross-sectional stock returns sorted by industry, size, value, and momentum. The driving force of the predictive power appears to stem from investors' biased beliefs about future cash flows.

Subfields: Economics and Econometrics, Finance, Management Science and Operations Research

View Paper: https://www.semanticscholar.org/paper/d764d14c880a6fb660fdfd3e07e9f134e73bad95

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In Economics and Econometrics

In Finance

In Management Science and Operations Research

Citations in the corpus

Manager sentiment and stock returns (2019, background): “Econometrically, Inoue and Kilian (2004) encourage 6The economic variables are reviewed in Goyal and Welch (2008), and the updated data for the first 14 variables are available from Amit Goyal’s website, http://www.”
Overnight Returns and Firm-Specific Investor Sentiment (2018, positive): “It would also be consistent with the finding of Hvidkjaer (2008) and Barber et al. (2009) that stocks with high (low) short-term retail investor demand underperform (outperform) over the long run and with the finding of Baker and Wurgler (2006) that when marketwide sentiment is high, stocks that are”