Bottom-up sentiment and return predictability of the market portfolio

Abstract

This paper provides strong evidence that market sentiment measured bottom-up from individual-stock sentiment is negatively related to future long-term market returns and is positively correlated with contemporaneous returns.

Overnight returns of industry exchange‐traded funds, investor sentiment, and futures market returns

“…This study presents three approaches to measure investor sentiment by employing overnight returns of industry ETFs. First, we use aggregate overnight returns of industry ETFs to measure investor sentiment, as suggested by Guo et al (2019). 3 The approach is presented as follows:…”

“…Prior studies have proposed various top‐down and bottom‐up approaches to measure investor sentiment (e.g., Aboody et al, 2018; Baker & Wurgler, 2006; Berkman et al, 2012; Da et al, 2015; Guo et al, 2019; Huang et al, 2015). The sentiment indices constructed from market‐level variables proposed by Baker and Wurgler (2006), Da et al (2015), and Huang et al (2015) are categorized as a top‐down approach, while those defined by Berkman et al (2012), Aboody et al (2018), and Guo et al (2019) are based on individual stock overnight returns and are thus a type of bottom‐up approach. On the basis of the conceptual idea of the bottom‐up approach, this study employs overnight returns of industry exchange‐traded funds (ETFs) to measure investor sentiment.…”

“…Avg is the cross-sectional value-weighted average of monthly overnight returns (close-to-open) for industry ETFs as follows (seeGuo et al, 2019): …”

“…As such, this study provides another approach to construct measures of investor sentiment using overnight returns of industry ETFs. While Guo et al (2019) construct investor sentiment by employing the overnight returns of all stocks listed on the NYSE, Amex, and Nasdaq, it is impossible for individual/retail investors, and even institutional investors, to calculate investor sentiment using their bottom-up approach, as it examines thousands of individual stocks. Instead, the approach suggested in this study uses only nine industry ETFs to estimate investor sentiment, making it more feasible for constructing an index of investor sentiment for individual/retail and institutional investors.…”

“…Berkman et al (2012) andAboody et al (2018) suggest that overnight returns of individual stocks are related to investor sentiment. On the basis of this,Guo et al (2019) indicate that investor sentiment can be calculated using overnight returns of individual stocks.LEE ET AL.…”