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Understanding time-varying short-horizon predictability✰

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  • Hammami, Yacine
  • Zhu, Jie

Abstract

Time-varying return predictability should stem either from time-varying dividend growth predictability or from time-varying dividend yield autocorrelation. The decomposition results show that the bulk of the variation in return predictability is due to its negative correlation with time-varying dividend yield autocorrelation, which is in turn positively correlated with investor sentiment. Using a linear regression based on these results, we confirm a significantly negative relation between investor sentiment and stock return predictability, after controlling for macroeconomic factors, dividend growth, and structural breaks. These findings suggest that investor sentiment is an important determinant of time-varying short-horizon predictability.

Suggested Citation

  • Hammami, Yacine & Zhu, Jie, 2020. "Understanding time-varying short-horizon predictability✰," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318304264
    DOI: 10.1016/j.frl.2019.01.009
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    Cited by:

    1. Rameeza Andleeb & Arshad Hassan, 2023. "Impact of Investor Sentiment on Contemporaneous and Future Equity Returns in Emerging Markets," SAGE Open, , vol. 13(3), pages 21582440231, August.
    2. Park, Jin Suk & Newaz, Mohammad Khaleq, 2021. "Liquidity and short-run predictability: Evidence from international stock markets," Global Finance Journal, Elsevier, vol. 50(C).
    3. repec:fst:rfsisf:v:8:y:2023:i:14:p:84-97 is not listed on IDEAS

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    More about this item

    Keywords

    Stock return predictability; Dividend yield persistency; Investor sentiment;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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