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A non-linear approach for predicting stock returns and volatility with the use of investor sentiment indices

Stelios Bekiros, Rangan Gupta () and Clement Kyei

Applied Economics, 2016, vol. 48, issue 31, 2895-2898

Abstract: The popular sentiment-based investor index S -super-BW introduced by Baker and Wurgler (2006, 2007) is shown to have no predictive ability for stock returns. However, Huang et al. (2015) developed a new investor sentiment index, S -super-PLS, which can predict monthly stock returns based on a linear framework. However, the linear model may lead to misspecification and lack of robustness. We provide statistical evidence that the relationship between stock returns, S -super-BW and S -super-PLS is characterized by structural instability and inherent nonlinearity. Given this, using a nonparametric causality approach, we show that neither S -super-BW nor S -super-PLS predicts stock market returns or even its volatility, as opposed to previous empirical evidence.

Date: 2016
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Working Paper: A Nonlinear Approach for Predicting Stock Returns and Volatility with the Use of Investor Sentiment Indices (2015)
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DOI: 10.1080/00036846.2015.1130793

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