Investor sentiment and paradigm shifts in equity return forecasting

Liya Chu, Xue-Zhong He, Kai Li, Jun Tu

Research output: Contribution to journalArticle

Abstract

This study investigates the impact of investor sentiment on excess equity return forecasting. A high (low) investor sentiment may weaken the connection between fundamental economic (behavioral-based non-fundamental) predictors and market returns. We find that although fundamental variables can be strong predictors when sentiment is low, they tend to lose their predictive power when investor sentiment is high. Non-fundamental predictors perform well during high-sentiment periods while their predictive ability deteriorates when investor sentiment is low. These paradigm shifts in equity return forecasting provide a key to understanding and resolving the lack of predictive power for both fundamental and non-fundamental variables debated in recent studies.
Original languageEnglish
JournalManagement Science
Publication statusAccepted/In press - 2020

Keywords

  • Return predictability
  • Investors sentiment
  • Economic predictors
  • Non-fundamental predictors

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