Investor sentiment and paradigm shifts in equity return forecasting

Liya Chu, Xuezhong He, Kai Li, Jun Tu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)


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 nonfundamental) 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. Nonfundamental 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 nonfundamental variables debated in recent studies.

Original languageEnglish
Pages (from-to)4301-4325
Number of pages25
JournalManagement Science
Issue number6
Publication statusPublished - Jun 2022


  • behavioral biases
  • economic predictors
  • non-fundamental predictors
  • regime-switching
  • return predictability


Dive into the research topics of 'Investor sentiment and paradigm shifts in equity return forecasting'. Together they form a unique fingerprint.

Cite this