investor sentiment aligned: a powerful predictor of stock returns for the q-group presentation on...
TRANSCRIPT
![Page 1: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/1.jpg)
Investor Sentiment Aligned: A Powerful Predictor of Stock Returns
For the Q-Group Presentation
on April 7th, 2017 at Charleston, SC.
Dashan Huang Fuwei Jiang Jun Tu Guofu Zhou
Singapore Management University (Huang, Jiang, Tu)
Washington University in St. Louis (Zhou)
![Page 2: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/2.jpg)
Sentiment and Stock Returns
Sentiment: People feel excessively optimistic or pessimistic
about a situation not justified by the facts at hand Long history in finance: Keynes (1936)
Theoretically, sentiment can drive asset prices away from their fundamental values due to limits of arbitrage
e.g., short-sell constraint, margin constraint, noise trader risk
Empirically, sentiment strongly predicts stocks that are speculative, hard to arbitrage, or in the short legs of long-short strategies e.g., Baker and Wurgler (2006, 2007), Baker, Wurgler, and Yuan (2012,
JFE), Stambaugh, Yu, and Yuan (2012, JFE)
![Page 3: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/3.jpg)
Why Sentiment Matter?: Some Macro Points
Money is scarce in recessions/downturns: In bad times, investors expect much higher
return to put money into stocks. Shocks in supply/liquidity:
Loss of returns on the market Loss of jobs
Risk appetite change: Investors are unwilling to take risks in good times
Borrowing constraints: ever more stringent
![Page 4: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/4.jpg)
Measurement of Sentiment Sentiment is not directly observable Baker and Wurgler (2006, JF) construct a sentiment index as
the first principal component (PC1) of the 6 sentiment proxies: Closed-end fund discount rate, CEFD Share turnover, TURN Number of IPOs, NIPO First-day returns of IPOs, RIPO Dividend premium, PDND Equity share in new issues, S
explains well the cross-sectional stock returns influential: > 1111 google citations
Bottom Line: the BW index cannot explain the time variation of the aggregate stock market return.
![Page 5: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/5.jpg)
What Do We Do? This paper seeks to answer
Does sentiment forecast the aggregate stock market if it is aligned in the right way?
What is the economic channel/driving force? We find
sentiment strongly forecasts the aggregate stock market; it outperforms greatly marcoeconomic predictors, at least in the
month-by-month horizon; The value of predictability is of economic/practical significance; The forecasting power of sentiment comes from the investor's
underreaction to cash flow information Theoretical basis:
Econometrically, a method eliminating a common noise of the proxies Economically, market trends and sentiment are related (e.g., De Long
et al. (1990, JPE), and Zhou and Zhu (2014, working paper)
![Page 6: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/6.jpg)
![Page 7: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/7.jpg)
![Page 8: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/8.jpg)
![Page 9: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/9.jpg)
![Page 10: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/10.jpg)
![Page 11: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/11.jpg)
![Page 12: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/12.jpg)
![Page 13: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/13.jpg)
![Page 14: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/14.jpg)
![Page 15: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/15.jpg)
![Page 16: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/16.jpg)
![Page 17: Investor Sentiment Aligned: A Powerful Predictor of Stock Returns For the Q-Group Presentation on April 7th, 2017 at Charleston, SC. Dashan Huang Fuwei](https://reader030.vdocuments.site/reader030/viewer/2022032723/56649cff5503460f949d00ba/html5/thumbnails/17.jpg)
Conclusions and Future Works This paper finds
sentiment strongly forecasts the aggregate stock market if it is aligned properly;
it outperforms greatly marcoeconomic predictors, at least in the month-by-month horizon;
The value of predictability is of economic/practical significance; The forecasting power of sentiment comes from the investor's
underreaction to cash flow information Future Research:
More sentiment proxies: Consumer sentiment VIX Returns on Art and Other Collectibles
Combined with technical analysis: More theory in addition to Zhou and Zhu (2014), and more empirical work
along lines of Neely, et al (2014) and Han and Zhou (2013).