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Do Measures of Investor Sentiment Predict Returns?Robert Neal |
ABSTRACT It has long been market folklore that the best time to buy stocks is when individual investors are bearish. We examine the forecast power of three popular measures of individual investor sentiment: the level of discounts on closed-end funds, the ratio of odd-lot sales to purchases, and net mutual fund redemptions. Using data from 1933 to 1993, we find evidence that fund discounts and net redemptions predict the size premiums, the difference between small and large firm returns, but little evidence that the odd-lot ratio predicts returns. Robert Neal is an associate professor at Indiana University School of Business and a former economist at the Federal Reserve Bank of Kansas City. Simon M. Wheatley is an assistant professor at the Australian Graduate School of Management, University of New South Wales. The authors thank Catherine Bonser-Neal, Gregg Brauer, Wayne Ferson, Robert Grauer, Avraham Kamara, Jon Karpoff, Paul Malatesta, Burton Malkiel, Jeffrey Pontiff, Edward Rice, Terry Shevlin, Tom Smith, an anonymous referee, and participants at seminars at Simon Fraser University and the University of Washington for comments. We also thank Martin Chew, Kevin Harper and Doug Rolph for research assistance, and the New York Stock Exchange and the Investment Company Institute for providing data. Previous versions of this paper were entitled "Closed-end fund discounts and the predictability of small firm returns." The views expressed are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System. Neal E-mail: skyking@indyvax.iupi.eduBack to top RWP home |