Composite Survey Sentiment as a Predictor of Future Market Returns: Evidence for German Equity Indices
Authors registered in the RePEc Author Service: Zuzana Gric
Working Papers from Czech National Bank
In this paper, I construct a novel composite sentiment indicator which captures the irrational beliefs of the general population in Germany. This indicator is used to demonstrate that the sentiment of the general public is responsible for temporary overreactions of the aggregate German stock market and also of its narrower segments as embodied in four important equity indices from the DAX family. My results show that population-wide beliefs work as a contrarian predictor of future returns on German equity indices for horizons of six to twelve months. In addition, an out-of-sample framework is developed to underline the degree of improvement achieved by combining several survey-based measures into one composite sentiment indicator. The results reveal that the composite indicator exhibits more accurate forecasting performance than the popular sentiment measure, consumer confidence.
Keywords: Composite indicator; consumer confidence; DAX indices; return predictability; sentiment (search for similar items in EconPapers)
JEL-codes: G17 G40 G41 (search for similar items in EconPapers)
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Journal Article: Composite survey sentiment as a predictor of future market returns: Evidence for German equity indices (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2020/13
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