Belief-based momentum indicator and stock market return predictability

Li et al. (2022) propose a new momentum indicator that combines past returns and consistent belief information, and show that the indicator positively predicts cross-sectional stock returns. Based on the momentum indicator of Li et al. (2022), we further develop a conditional past return (CPR) indicator that additionally adds the direction information for the investors' consistent belief. We examine the effectiveness of CPR as a predictor for stock market returns. Our evidence shows that CPR significantly and positively predicts future one-month market returns. And CPR provides unique predictive information that is not related to the other popular predictors. The abundant out-of-sample evidence further supports CPR’s predictive ability. Additionally, we detect the asymmetric role of CPR in predicting market returns and find that much of the predictive ability of CPR is attributed to the interaction between the positive past returns and the positive consistent belief.