On the Predictive Power of Sentiment - Why Institutional Investors are Worth Their Pay

32 Pages Posted: 27 Feb 2007

Date Written: December 2006

Abstract

We use a unique dataset of private and institutional investors' sentiments to describe their forecasting behavior and to develop a trading strategy based on sentiment. We show that professional analysts are indeed able to forecast future price movements in the medium term (about 6 months in advance). Private investors are not skilled at predicting price movements; we even find evidence that suggests that their sentiment may be a contra indicator. Neither institutional nor private investors can correctly forecast returns a month in advance. It seems that for this kind of short-term prediction, private and institutional investors heavily rely on the past weeks' and months' returns. Applying our trading strategy on out-of-sample data, delivers mixed results. We conclude that institutional investors' sentiment is useful when forecasting returns, especially in respect of their home market.

Keywords: Asset Pricing, Sentiment, Institutional Investors, Private Investors, Investor Behavior, Behavioral Finance

JEL Classification: G1

Suggested Citation

Zwergel, Bernhard and Klein, Christian, On the Predictive Power of Sentiment - Why Institutional Investors are Worth Their Pay (December 2006). Available at SSRN: https://ssrn.com/abstract=965890 or http://dx.doi.org/10.2139/ssrn.965890

Bernhard Zwergel

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Christian Klein (Contact Author)

University of Kassel ( email )

Nora Platiel Str.4
Kassel, Hessen 34109
Germany

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