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Composite survey sentiment as a predictor of future market returns: Evidence for German equity indices

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  • Rakovská, Zuzana

Abstract

In this paper, I construct a novel composite sentiment indicator which captures the irrational beliefs of a general population in Germany. This indicator is used to demonstrate that sentiment of a general public is responsible for temporary overreaction of the aggregate German stock market, but also its narrower segments embodied in four important equity indices from the DAX family. My results show that population-wide beliefs work as a contrarian predictor of future returns of German equity indices for horizons of six to twelve months. In addition, the out-of-sample framework is developed to underline the degree of improvement achieved by combining several survey-based measures into one composite sentiment indicator. The results reveal that the composite indicator exhibits a more accurate forecasting performance than the popular sentiment measure, consumer confidence.

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  • Rakovská, Zuzana, 2021. "Composite survey sentiment as a predictor of future market returns: Evidence for German equity indices," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 473-495.
    • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:473-495
    DOI: 10.1016/j.iref.2020.12.022
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    More about this item

    Keywords

    Composite indicatort; Consumer confidence; DAX indices; Return predictability; Sentiment;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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