Market Sentiment and Paradigm Shifts

Liya Chu, Xuezhong (Tony) He, Kai Li and Jun Tu
Additional contact information
Liya Chu: Singapore Management University
Jun Tu: Singapore Management University

No 356, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: The equity premium forecasting literature provides ample evidence of predictability for both fundamental economic variables and non-fundamental variables, such as time-series momentum. In this paper, we study the role of investor setiment in equity premium predictability. Consistent with the theory of investor sentiment, we find that although economic variables can have strong predicting power when investor sentiment is low, their predictability tends to become insignificant when investor sentiment is high and the fundamental link between economic variables and equity premium is weakened. In contrast, the predictability of non-fundamental variables can be strong in high sentiment periods while tends to vanish away when sentiment is low and behavioural actions boosting the predictability of non-fundamental variables are moderated. Moreover, about 80% (20%) times can be classified as low (high) sentiment periods in our framework, which idicates that economic variables could be a more prevalent force than non-fundamental variables in terms of predicting equity premium

Keywords: Return predictability; fundamental; momentum; investor sentiment (search for similar items in EconPapers)
JEL-codes: C53 G12 G17 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2015-03-01
New Economics Papers: this item is included in nep-sea
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp356.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:356

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().