Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/24866
Authors: 
Lux, Thomas
Year of Publication: 
2008
Series/Report no.: 
Kiel Working Paper 1470
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.
Subjects: 
Investor sentiment
opinion dynamics
return predictability
JEL: 
G12
G14
C22
Document Type: 
Working Paper

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