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A new investor sentiment indicator (ISI) based on artificial intelligence: A powerful return predictor in China

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  • Ruan, Qingsong
  • Wang, Zilin
  • Zhou, Yaping
  • Lv, Dayong

Abstract

This paper utilizes deep learning approach widely documented in artificial intelligence, and proposes an investor-sentiment indicator (ISI) that is consistent with the purpose of forecasting stock market returns. We find that ISI is positively correlated with future stock market returns at a monthly frequency, but negatively associated with subsequent returns over a longer horizon. Moreover, ISI outperforms other well-recognized predictors both in and out of sample, and can predict cross-sectional stock returns sorted by industry. We also show a positive association between monthly ISI and dividend growth rate, which indicates that investors’ expectations about future cash flows may contribute to the return predictability of ISI.

Suggested Citation

  • Ruan, Qingsong & Wang, Zilin & Zhou, Yaping & Lv, Dayong, 2020. "A new investor sentiment indicator (ISI) based on artificial intelligence: A powerful return predictor in China," Economic Modelling, Elsevier, vol. 88(C), pages 47-58.
    • Handle: RePEc:eee:ecmode:v:88:y:2020:i:c:p:47-58
    DOI: 10.1016/j.econmod.2019.09.009
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    More about this item

    Keywords

    Investor sentiment; Artificial intelligence; Return predictability; Asset allocation; Cash flow;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other

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