Kiel Working Papers, Kiel Institute for World Economics
No 1470:
Sentiment Dynamics and Stock Returns: The Case of the German Stock Market
Thomas Lux
Abstract: We use weekly survey data on short-term and medium-term
sentiment of German investors in order to study the causal relationship
between investors' mood and subsequent stock price changes. In contrast to
extant literature for other countries, a tri-variate vector autoregression
for short-run sentiment, medium-run sentiment and stock index returns
allows to reject exogeneity of returns. Depending on the chosen VAR
specification, returns are found to either follow a feedback process caused
by medium-run sentiment, or returns form a simultaneous systems together
with the two sentiment measures. An out-of-sample forecasting experiment on
the base of estimated VAR models shows significant exploitable linear
structure for the richer VAR(5) model. Out-of-sample trading experiments
underscore the potential for excess profits from a VAR-based strategy
compared to the buy-and-hold benchmark
Keywords: investor sentiment, opinion dynamics, return predictability; (follow links to similar papers)
JEL-Codes: G12,; G14,; C22; (follow links to similar papers)
28 pages, December 2008
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Downloadable files:
KWP_1470_SentimentDynamics.pdf 
Download Statistics
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design Joakim Ekebom
