Authors：Liya Chu (East China University of Science and Technology), Xue-Zhong He (Xi'an Jiaotong-Liverpool University), Kai Li (Southwestern University of Finance and Economics; Macquarie University), Jun Tu* (Singapore Management University)
Abstract:
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 • economic predictors • non-fundamental predictors • regime-switching • behavioral biases
Correction：
In this article, “Investor Sentiment and Paradigm Shifts in Equity Return Forecasting” by Liya Chu, Xue-Zhong He, Kai Li, Jun Tu (first published in Articles in Advance, April 5, 2022, Management Science, DOI:10.1287/mnsc.2020.3834), Liya Chu’s email address and ORCID ID have been added to the contact information, and Xue-Zhong He’s affiliation and email address have been updated to reflect his current information. The following sentence has also been added to the Acknowledgment section: Liya Chu and Kai Li contributed equally to the article.
