Do investors' sentiment dynamics affect stock returns? Evidence from the US economy

This paper contributes to the understanding of the non-linear causal linkage between investors' sentiment dynamics and stock returns for the US economy. Employing the sentiment index developed by Baker and Wurgler [Baker, M., Wurgler, J., 2007. Investor sentiment in the stock market. Journal of Economic Perspectives 21 (2), 129-151] and within a non-linear causality framework, we found that sentiment embodies significant predictive power with respect to stock returns. (C) 2012 Elsevier B.V. All rights reserved.