Does investor sentiment predict Mexican equity returns?
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 29 May 2018
Issue publication date: 9 July 2018
Abstract
Purpose
The purpose of this paper is to test whether investor sentiment is a significant predictor of future Mexican stock market returns. It also estimates the dynamic correlation between investor sentiment and equity returns. Finally, it examines if investor sentiment innovations impact unexpected returns for a variety of portfolios.
Design/methodology/approach
This study utilizes predictive regressions to determine if sentiment can predict Mexican equity returns. Multivariate GARCH models are estimated to examine the time-varying correlations between investor sentiment and equity returns.
Findings
The results show that Mexican investor sentiment is a significant predictor of Mexican equity returns for up to 24 months ahead. The findings show that high levels of sentiment today are associated with lower equity returns over the near term. Furthermore, multivariate GARCH estimations indicate that the correlation between investor sentiment and equity returns is not static and varies considerably over time. Finally, the findings indicate that sentiment innovations are significantly correlated with unexpected returns, reinforcing the notion that unexplained sentiment fluctuations lead to unexplained changes in stock market returns. Overall, these results suggest that investor sentiment is a significant source of risk for the Mexican stock market.
Originality/value
This study seeks to further our understanding of how behavioral factors influence and predict Mexican equity returns.
Keywords
Citation
Liston-Perez, D., Torres-Palacio, P. and Bayram, S.G. (2018), "Does investor sentiment predict Mexican equity returns?", International Journal of Managerial Finance, Vol. 14 No. 4, pp. 484-502. https://doi.org/10.1108/IJMF-05-2017-0088
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited