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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