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Article
Publication date: 29 May 2018

Daniel Liston-Perez, Patricio Torres-Palacio and Sidika Gulfem Bayram

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…

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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.

Details

International Journal of Managerial Finance, vol. 14 no. 4
Type: Research Article
ISSN: 1743-9132

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