Stock Return Predictability and Investor Sentiment: A High-Frequency Perspective

Abstract

We explore the predictive relation between high-frequency investor sentiment and stock market returns. Our results are based on a proprietary dataset of high-frequency investor sentiment, which is computed based on a comprehensive textual analysis of sources from news wires, internet news sources, and social media. We find substantial evidence that intraday S&P 500 index returns are predictable using lagged half-hour investor sentiment. The predictability is evident based on both in-sample and out-of-sample statistical metrics. We document that this sentiment effect is independent of the intraday momentum effect, which is based on lagged half-hour returns. While the intraday momentum effect only exists in the last half hour, the sentiment effect persists in at least the last two hours of a trading day. From an investment perspective, high-frequency investor sentiment also appears to have significant economic value when evaluated with market timing trading strategies.

Keywords: Intraday, Investor Sentiment, High Frequency, Stock Return Predictability

JEL Classification: G11, G14