Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2022
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.
Keywords
Return predictability, Investors sentiment, Economic predictors, Non-fundamental predictors
Discipline
Finance | Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Management Science
First Page
1
Last Page
25
ISSN
0025-1909
Identifier
10.1287/mnsc.2020.3834
Publisher
Institute for Operations Research and Management Sciences
Citation
CHU, Liya; LI, Kai; HE, Tony Xue-zhong; and Jun TU.
Investor sentiment and paradigm shifts in equity premium forecasting. (2022). Management Science. 1-25.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7019
Copyright Owner and License
Authors
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/10.1287/mnsc.2020.3834
Included in
Finance Commons, Finance and Financial Management Commons, Portfolio and Security Analysis Commons