44 Pages Posted: 10 Apr 2017 Last revised: 12 Apr 2017
Date Written: April 10, 2017
Recent evidence shows that investor sentiment predicts the cross-section of returns and it has larger effects on hard to value and difficult to arbitrage stocks such as high volatility, young, small, unprofitable, and non-dividend paying stocks. Furthermore, the evidence shows that subsequent returns are relatively low (high) for hard to value stocks following high (low) Baker and Wurgler’s (BW) sentiment index suggesting that such stocks are relatively overpriced (underpriced) during high (low) sentiment periods. We present new evidence showing that the prediction of subsequent lower (higher) returns of hard to value stocks following high (low) BW sentiment index occur only when subsequent investor sentiment decreases (increases). In fact, hard to value stocks earn relatively higher (lower) returns following high (low) sentiment periods when the subsequent sentiment increases (decreases).
Keywords: Sentiment changes Index, Sentiment levels index, Sentiment dynamics, Hard to value stocks
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation
Cheema, Muhammad A. and Nartea, Gilbert V., Does Sentiment Index Predict Future Returns? (April 10, 2017). Available at SSRN: https://ssrn.com/abstract=2949772