The Role of an Aligned Investor Sentiment Index in Predicting Bond Risk Premia of the United States

Oguzhan Cepni, I. Ethem Guney (), Rangan Gupta and Mark Wohar ()
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I. Ethem Guney: Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara,Turkey

No 201973, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, we develop a new investor sentiment index that is aligned with the purpose of predicting the excess returns on government bonds of the United States (US) of maturities of 2-, 3-, 4-, 5-year. By eliminating a common noise component in underlying sentiment proxies using the partial least squares (PLS) approach, the new index is shown to have much greater predictive power than the original principal component analysis (PCA)-based sentiment index both in- and out-of-sample, with the predictability being 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 Treasury securities in forecasting of output and inflation, and portfolio allocation decisions, our findings have significant implications for investors, policymakers and researchers interested in accurately forecasting return dynamics for these assets.

Keywords: Bond premia; Investor attention; Investor sentiment; Predictability; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: C22 C53 G12 G17 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2019-09
New Economics Papers: this item is included in nep-fmk and nep-for
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201973

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