Publication Type

Journal Article

Version

Preprint

Publication Date

3-2015

Abstract

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.

Keywords

Investor Sentiment, Asset Pricing, Return Predictability, Cash Flow, Discount Rate

Discipline

Corporate Finance | Finance and Financial Management

Research Areas

Finance

Publication

Review of Financial Studies

Volume

28

Issue

3

First Page

791

Last Page

837

ISSN

0893-9454

Identifier

10.1093/rfs/hhu080

Publisher

Oxford University Press

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1093/rfs/hhu080

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