Trading Strategies: Forecasting Index Futures Prices with Short-Term Investor Sentiment

Behavior Finance Theory explains the short-term deviations of futures price. However, the previous studies generally view sentiment as one-time dimension. This article, on a larger basis, captures both long-term and short-term investor sentiment. In such case, short-term predictive power of investor sentiment on index futures returns can be analyzed in two prospects. On the one hand, the spot market sentiment and futures market sentiment have more predictive power on short-term components of returns than long-term components of returns. On the other hand, short-term sentiment components of spot market and futures market are more statistically significant on returns than long-term components. To further explain that, out-of-sample evidence of short-term sentiment trading strategies is presented, which proves a statistically significant return with an annualized return of 40% and annualized Sharpe ratio of 2.4.