Treasury return predictability and investor sentiment

Chen Gu, Xu Guo, Ruwan Adikaram, Kam C. Chan, Jing Lu

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Pages (from-to)905-924
Number of pages20
JournalJournal of Financial Research
Volume46
Issue number4
DOIs
StatePublished - Dec 1 2023

Bibliographical note

Publisher Copyright:
© 2023 The Southern Finance Association and the Southwestern Finance Association.

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