Abstract

https://ssrn.com/abstract=2311618
 


 



Investor Sentiment Aligned: A Powerful Predictor of Stock Returns


Dashan Huang


Singapore Management University - Lee Kong Chian School of Business

Fuwei Jiang


Central University of Finance and Economics (CUFE) - School of Finance

Jun Tu


Singapore Management University - Lee Kong Chian School of Business

Guofu Zhou


Washington University in St. Louis - Olin School of Business

October 13, 2014


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 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 stemming from investors’ biased belief about future cash flows.

Number of Pages in PDF File: 67

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

JEL Classification: C53, G11, G12, G17


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Date posted: August 19, 2013 ; Last revised: October 15, 2014

Suggested Citation

Huang, Dashan and Jiang, Fuwei and Tu, Jun and Zhou, Guofu, Investor Sentiment Aligned: A Powerful Predictor of Stock Returns (October 13, 2014). Available at SSRN: https://ssrn.com/abstract=2311618 or http://dx.doi.org/10.2139/ssrn.2311618

Contact Information

Dashan Huang
Singapore Management University - Lee Kong Chian School of Business ( email )
50 Stamford Road
Singapore, 178899
Singapore
HOME PAGE: http://sites.google.com/site/dashanhuang2012/

Fuwei Jiang (Contact Author)
Central University of Finance and Economics (CUFE) - School of Finance ( email )
39 South College Road
Haidian District
Beijing, 100081
China
Jun Tu
Singapore Management University - Lee Kong Chian School of Business ( email )
50 Stamford Road
#04-01
Singapore, 178899
Singapore

Guofu Zhou
Washington University in St. Louis - Olin School of Business ( email )
Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)
HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/
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