Using sentiment to predict GDP growth and stock returns
Giselle Guzman
MPRA Paper from University Library of Munich, Germany
Abstract:
This study sheds new light on the question of whether or not sentiment surveys, and the expectations derived from them, are relevant to forecasting economic growth and stock returns, and whether they contain information that is orthogonal to macroeconomic and financial data. I examine 16 sentiment surveys of distinct respondent universes and employ the technique of principal components analysis to extract the common signals from the surveys. I show that the ability of different population groups to anticipate correctly economic growth and excess stock returns is not identical, implying that not all sentiment is the same, although there exist some common components. I demonstrate that sentiment surveys have significant predictive power for both GDP growth and excess stock returns, and that the results are robust to the inclusion of information pertaining to the macroeconomic environment and momentum. Furthermore, the findings reject the conventional wisdom that the effect of sentiment is apparent exclusively in small-capitalization stocks.
Keywords: sentiment; surveys; expectations; GDP growth; stock returns; small-cap stocks, Efficient Markets Hypothesis; anomalies; predictability; economic growth; principal components analysis; signal extraction; composite factors; synthetic variables (search for similar items in EconPapers)
JEL-codes: C00 C01 C02 C13 C19 C20 C30 C42 C50 C51 C52 C53 C59 C60 C63 C81 C82 D01 D03 D10 D11 D12 D53 D83 D84 E00 E10 E17 E21 E32 E40 E44 E51 G00 G10 G12 G14 Y40 (search for similar items in EconPapers)
Date: 2008-06-29
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Citations:
Published in The Making of National Economic Forecasts Edward Elgar Publishing LTD (2009): pp. 319-351
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https://mpra.ub.uni-muenchen.de/36505/1/MPRA_paper_36505.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/40203/2/MPRA_paper_40203.pdf revised version (application/pdf)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:36505
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