Publication Type
Journal Article
Version
acceptedVersion
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
Citation
HUANG, Dashan; JIANG, Fuwei; TU, Jun; and ZHOU, Guofu.
Investor sentiment aligned: A powerful predictor of stock returns. (2015). Review of Financial Studies. 28, (3), 791-837.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3775
Copyright Owner and License
Authors / SKBI
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/rfs/hhu080