Does Investor Sentiment Predict Future Mexican Stock Market Returns?

Abstract

This paper studies whether investor sentiment can predict future Mexican stock market returns. Furthermore, we examine the dynamic correlation between sentiment and returns. Lastly, we examine whether sentiment innovations influence unexpected returns. We find that sentiment has significant predictive power up to 24 months ahead. Higher levels of sentiment today lead to lower returns in the future. We also find that the correlation between investor sentiment and equity returns varies over time. Finally, we find that sentiment innovations are correlated with unexpected returns. Overall, the results suggest that investor sentiment is an important risk factor for the Mexican stock market.

Keywords: Investor Sentiment, Mexico, Returns, Predictive Regressions

JEL Classification: G02, G12, G15