Investor Sentiment: Predicting the Overvalued Stock Market

10 Pages Posted: 2 Apr 2018 Last revised: 18 May 2020

See all articles by Muhammad A. Cheema

Muhammad A. Cheema

University of Otago - School of Business

Yimei Man

University of Waikato, Management School

Kenneth R Szulczyk

Al Akhawayn University

Date Written: May 15, 2020

Abstract

The research literature shows that investor sentiment is a contrarian predictor of aggregate stock market returns. However, we contend that investor sentiment only predicts aggregate stock market returns during high-sentiment states where overpricing is more prevalent than underpricing. Using a two-state predictive regression model, we find that the investor sentiment indexes of both Baker and Wurgler (2006) and Huang et al. (2014) are contrarian predictors of aggregate stock market returns at all horizons during high-sentiment states, which agrees with our hypothesis.

Keywords: Investor Sentiment, Overpricing, Underpricing, Stock Market Returns

JEL Classification: C53, G11, G12, G17

Suggested Citation

Cheema, Muhammad A. and Man, Yimei and Szulczyk, Kenneth R, Investor Sentiment: Predicting the Overvalued Stock Market (May 15, 2020). Available at SSRN: https://ssrn.com/abstract=3151185 or http://dx.doi.org/10.2139/ssrn.3151185

Muhammad A. Cheema (Contact Author)

University of Otago - School of Business ( email )

Yimei Man

University of Waikato, Management School ( email )

Hamilton
New Zealand

Kenneth R Szulczyk

Al Akhawayn University ( email )

PO Box 104 Hassan II Avenue
Ifrane, Meknès-Tafilalet Region 53000
Morocco

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