Investor Sentiment Aligned: A Powerful Predictor of Stock Returns

Dashan Huang, Fuwei Jiang, Jun Tu and Guofu Zhou ()
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Dashan Huang: Singapore Management University
Fuwei Jiang: Central University of Finance and Economics
Jun Tu: Singapore Management University
Guofu Zhou: Washington University in St. Louis and CAFR

No 676, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: We propose a new investor sentiment index that is aligned with the purpose of predicting the aggregate stock market. By eliminating a common noise component in sentiment proxies, the new index has much greater predictive power than existing sentiment indices have both in and out of sample, and the predictability becomes both statistically and economically significant. In addition, it outperforms well-recognized macroeconomic variables and can also predict cross-sectional stock returns sorted by industry, size, value, and momentum. The driving force of the predictive power appears to stem from investors' biased beliefs about future cash flows.

JEL-codes: C53 G11 G12 G17 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015
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Citations: View citations in EconPapers (39)

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Journal Article: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns (2015)
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