Treasury return predictability and investor sentiment |
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| Authors: | Chen Gu Xu Guo Ruwan Adikaram Kam C Chan Jing Lu |
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| Institution: | 1. Research Center of Finance, Shanghai Business School, Shanghai, China;2. Department of Risk Management and Insurance, College of Economics, Shenzhen University, Shenzhen, China;3. Department of Accounting and Finance, University of Minnesota Duluth, Duluth, Minnesota, USA;4. School of Economics and Business, Chongqing University, Chongqing, China |
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| Abstract: | We document that the Treasury market investor sentiment (TSENT) of institutional investors is a powerful predictor of bond risk premia. Specifically, TSENT positively predicts Treasury bond excess returns in and out of sample. The forecasting gains of TSENT are incremental to those in conventional bond return predictors: Fama–Bliss forward spreads, Cochrane–Piazzesi forward rate factor, and Ludvigson–Ng macro factor, as well as equity market sentiment proxies such as the investor sentiment index and the partial least squares sentiment index. Asset allocation analysis indicates the forecasting power of TSENT is economically valuable to investors. Finally, we show that the time-series bond risk premia predictability associated with TSENT relates to its predictive power for macroeconomic performance, such as payroll employment, unemployment rate, and industrial production. |
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