Congratulations to Dr. Kai Li for his latest publication "Investor Sentiment and Paradigm Shifts in Equity Return Forecasting," joint with Liya Chu (East China University of Science and Technology), Xue-Zhong He (Xi'an Jiaotong-Liverpool University), and Jun Tu* (Singapore Management University)
Title: Investor Sentiment and Paradigm Shifts in Equity Return Forecasting
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.
