When does investor sentiment predict stock returns?

The Effect of Investor Sentiment on Stock Returns: Insight from Emerging Asian Markets

“…As succinctly noted by Chung, Hung and Yeh (2012), mispricings driven by investor sentiment is corrected in the following periods as sentiment declines and the true value of the stocks is realized. This, then, implies that investor sentiment will be negatively related to future stock returns.…”

“…Fisher and Statman (2003) and Baker and Wurgler (2006) among others also document a similar association. Recently, Chung et al (2012) find evidence that sentiment predicts returns of portfolios, formed based on specific characteristics such as size and age, in the US market. However, this predictive power is largely limited to expansion state.…”

Asymmetric Relationship between Investors' Sentiment and Stock Returns: Evidence from a Quantile Non‐causality Test

“…This implies that the government should pay more attention to the investor sentiment in a recession and perform the positive induction. In the literature, Chung et al () also investigated the asymmetry in the predictive power of investor sentiment in the cross section of stock returns across economic expansion and recession states. However, Chung et al () adopted the NBER's classification and separated the states of the economy into recession and expansion regimes, which might be restrictive in practice.…”

“…For example, Baker and Wurgler () argued that the pattern of stock return predictability of investor sentiment varied by stock characteristic (e.g., firm size, volatility, and age). Chung et al () found that the predictive power of investor sentiment was generally significant in the expansionary state, but non‐significant in the recessionary state. Kim and Kim () found no evidence concerning the return predictability of investor sentiment measured by Internet message postings.…”

The Validity of Investor Sentiment Proxies

“…Baker and Wurgler's measures are monthly. Papers, which use this methodology or measures, include Tsuji (); Yu and Yuan (); Baker et al (); Chung et al (), and Stambaugh et al (). Sent^ and Sent were obtained from Jeffrey Wurgler's website: http://pages.stern.nyu.edu/~jwurgler/main.htm (obtained on the November 14, 2015).…”