According to the latest data released by Web of Science ESI, "Investor Sentiment Aligned: A Powerful Predictor of Stock Returns", co-authored by Associate Professor Fuwei JIANG of the School of Finance, Dashan Huang, Jun Tu and Guofu Zhou, was selected as one of the world's top 1% cited papers in the field of economics and business, and was included in highly cited papers by ESI (Essential Science Indicator). This paper was published onReview of Financial Studies(RFS), one of the top three financial journals, in March 2015. By July 2018, it had been cited 42 times and had an important impact in the field of behavioral finance and asset pricing. This paper was previously awarded by RFS with the 2015-2017 Highest Readings Award and the highest cited paper award.

Investor Sentiment Aligned: A Powerful Predictor of Stock Returns

Review of Financial Studies28, 791-837, 2015

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Jun Tu

Singapore Management University - Lee Kong Chian School of Business

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School; China Academy of Financial Research (CAFR)

Abstract:We propose a new investor sentiment index that is aligned with the purpose of predicting the aggregate stock market. By eliminating a common noise component in sentiment proxies, the new index has much greater predictive power than existing sentiment indices both in- and out-of-sample, and the predictability becomes both statistically and economically significant. In addition, it outperforms well recognized macroeconomic variables and can also predict cross-sectional stock returns sorted by industry, size, value, and momentum. The driving force of the predictive power appears stemming from investors’ biased belief about future cash flows.

Keywords: Investor Sentiment, Asset Pricing, Return Predictability, Cash Flow, Discount Rate