Investor Sentiment and Paradigm Shifts in Equity Return Forecasting
forthcoming in Management Science
Posted: 6 Jun 2019 Last revised: 3 Dec 2020
Date Written: May 20, 2019
This study investigates the impact of investor sentiment on excess equity return forecasting. A high (low) investor sentiment may weaken the connection between fundamental economic (behavioral-based non-fundamental) predictors and market returns. We find that although fundamental variables can be strong predictors when sentiment is low, they tend to lose their predictive power when investor sentiment is high. Non-fundamental predictors perform well during high-sentiment periods while their predictive ability deteriorates when investor sentiment is low. These paradigm shifts in equity return forecasting provide a key to understanding and resolving the lack of predictive power for both fundamental and non-fundamental variables debated in recent studies.
Keywords: Return predictability, Investors sentiment, Economic predictors, Non-fundamental predictors
JEL Classification: C53, G02, G12, G14, G17
Suggested Citation: Suggested Citation