We propose a new investor sentiment index that is aligned with the purpose of predicting the aggregate stock market. By eliminating a common noise component in sentiment proxies, the new index has much greater predictive power than existing sentiment indices both in- and out-of-sample, and the...

We explore the effects of fundamental extrapolation on stock returns. Empirically, we propose a novel approach to extrapolate firms' fundamental information and find that a strategy based on fundamental extrapolation earns an average return of 0.80% per month. Theoretically, we show that...

This paper shows that investors do not fully incorporate cost behavior information into valuation. Firms with higher growth in operating costs generate substantially lower future stock returns and operating performance. An equal-weighted long-short spread portfolio earns an average return of 82...

Can the degree of predictability found in the data be explained by existing asset pricing models? We provide two theoretical upper bounds on the R-squares of predictive regressions. Using data on the market and component portfolios, we find that the empirical R-squares are significantly greater...

This paper proposes a two-state predictive regression model and shows that stock market 12-month return (TMR), the time-series momentum predictor of Moskowitz, Ooi, and Pedersen (2012), forecasts the aggregate stock market negatively in good times and positively in bad times. The out-of-sample...

We find that expected return is related to trading volume positively among underpriced stocks but negatively among overpriced stocks. As such, trading volume amplifies mispricing. Our results are robust to alternative mispricing and trading volume measures, alternative portfolio formation...

Time series momentum (TSM) refers to the predictability of the past 12-month return on the next one-month return and is the focus of several recent influential studies. This paper shows that asset-by-asset time series regressions reveal little evidence of TSM, both in- and out-of-sample. While...

We reaffirm the stylized fact that bond risk premia are time-varying with macroeconomic condition, even with real-time macro data instead of commonly used final revised data. While real-time data are noisier and render standard forecasts insignificant, we find that, with four efficient...