Explaining and forecasting abnormal returns and volume by investor sentiment indicators

This study investigates the impact of investor sentiment on stock returns and trading volume, challenging the efficient market hypothesis. Using CRSP data from May 1998 to March 2022, methods like Fama-MacBeth and quantile regression were applied to analyze sentiment indicators such as the VIX, AAII Investor Sentiment Survey, Consumer Confidence, and Baker Wurgler Index. The findings reveal that investor sentiment significantly influences stock returns and trading volume, especially during uncertain times. Sentiment also affects financial metrics like SMB, HML, RMW, and CMA uniquely. This research provides new insights and practical implications for investors and analysts, emphasizing the importance of considering sentiment in investment strategies to better anticipate market movements and manage risks.