 The role of an aligned investor sentiment index in predicting bond risk premia of the U.SOguzhan Cepni, I. Ethem Guney, Rangan Gupta and Mark Wohar () Journal of Financial Markets, 2020, vol. 51, issue C Abstract: In this paper, we develop a new investor sentiment index that is aligned to predict the excess returns on U.S. government bonds that have 2–5 years maturities. The new index is constructed by eliminating a common noise component in underlying sentiment proxies using the partial least squares (PLS) approach. The findings show that the new aligned sentiment index has much greater predictive power than the original principal component analysis (PCA)-based sentiment index both in- and out-of-sample. In addition, predictability is statistically significant, especially for bond premia with shorter maturities, even after controlling for a large number of financial and macro factors, as well as investor attention and manager sentiment indexes. Given the role of U.S. Treasury securities in forecasting of output and inflation, as well as in portfolio allocation decisions, our findings have significant implications for investors, policymakers, and researchers interested in accurately the forecasting return dynamics for these assets. Keywords: Bond premia; Investor attention; Investor sentiment; Predictability; Out-of-sample forecasts (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:51:y:2020:i:c:s1386418120300100 DOI: 10.1016/j.finmar.2020.100541 Access Statistics for this article Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam More articles in Journal of Financial Markets from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.