Predicting Stock Returns and Volatility with Investor Sentiment Indices: A Reconsideration using a Nonparametric Causality-in-Quantiles Test
Rangan Gupta and
No 201575, Working Papers from University of Pretoria, Department of Economics
Evidence of monthly stock returns predictability based on popular investor sentiment indices, namely SBW and SPLS as introduced by Baker and Wurgler (2006, 2007) and Huang et al. (2015) respectively are mixed. While, linear predictive models show that only SPLS can predict excess stock returns, nonparametric models (which accounts for misspecification of the linear frameworks due to nonlinearity and regime changes) finds no evidence of predictability based on either of these two indices for not only stock returns, but also its volatility. However, in this paper, we show that when we use a more general nonparametric causality-in –quantiles model of Balcilar et al., (2015), in fact, both SBW and SPLS can predict stock returns and its volatility, with SPLS being a relatively stronger predictor of excess returns during bear and bull regimes, and SBW being a relatively powerful predictor of volatility of excess stock returns, barring the median of the conditional distribution.
Keywords: Investor sentiment; stock markets; linear causality; nonlinear dependence; nonparametric causality; causality-in-quantiles (search for similar items in EconPapers)
JEL-codes: C22 C32 C53 G02 G10 G11 G17 (search for similar items in EconPapers)
Pages: 12 pages
New Economics Papers: this item is included in nep-fmk, nep-for and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201575
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