Profitability of return and sentiment-based investment strategies in US futures markets

Walid Bahloul () and Abdelfettah Bouri

Research in International Business and Finance, 2016, vol. 36, issue C, 254-270

Abstract: Our study adds to the literature by providing initial evidence on the interaction between short-horizon return predictability and investors’ sentiment by traders’ types on US commodity futures market. We find that the short-term contrarian profit is more associated with an increase rather than a decrease in hedgers’ sentiment. However, the interaction between lagged return and past change in speculators’ sentiment illustrates that the short-term contrarian profit is more associated with a decrease rather than an increase in sentiment. Based on behavioral finance theories, we conclude that hedgers behave like irrational traders while speculators behave like rational ones. Using Chou et al. (2007) decomposition, our results confirm the obtained relations between change in trader's sentiment and the overreaction. By expanding this decomposition, we find that the winners’ portfolio tends to more overreact with futures specific information. Also, the cross-autocorrelation between winners and losers and between losers and winners can represent another source of contrarian profits.

Keywords: Futures markets; Contrarian; Overreaction; Investors sentiment (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:36:y:2016:i:c:p:254-270

DOI: 10.1016/j.ribaf.2015.09.007

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