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Bootstrap rolling-window Granger causality dynamics between momentum and sentiment: implications for investors

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Abstract

This paper seeks to examine the unidirectional versus bidirectional Granger causality between investors’ sentiment and momentum strategies. It is based on the full sample Granger causality test and the recent rolling-window bootstrap approach. We also applied a probit model to the extent to which the probability that investors’ sentiment and momentum strategies influence each other. Our results suggest bidirectional Granger causality between investor sentiment and momentum strategy with unstable causality dynamics over time. We find that ADS and VIX positively affect the likelihood that investor sentiment Granger causes momentum strategy and negatively impact the probability that momentum strategy Granger causes investor sentiment. Gold harms the likelihood that investors’ sentiment and momentum strategies affect each other. The research design is unique to combine bootstrap rolling-window Granger causality tests between Sentiment and Momentum to assess investors’ implications in terms of confidence, uncertainty, aggressiveness, or optimism versus Pessimism.

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Notes

  1. In 12 European markets, Rouwenhorst (1998) discovers a positive momentum return. Hameed and Kusnadi (2002) show that momentum strategies are profitable in the Asian market. In 40 different countries, Griffin et al. (2003) find that the momentum portfolio earns a profitable return.

  2. The first group is based on market prices and includes the closed-end funds discount (CEFD), the put/call ratio, and the short-interest ratio. At the same time, the second group is derived from the polling of investors and encloses the University of Michigan Consumer Sentiment Index (CSI), the survey of the American Association of Individual Investors (AAII), and the Investors’ Intelligence index (II).

  3. The macroeconomic indicators are real growth in durable consumption, growth in industrial production, growth in employment, services consumption, nondurable consumption, and National Bureau of Economic Research recession indicator.

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Authors and Affiliations

  1. ISIG Kairouan, University of Kairouan, Kairouan, Tunisia

    Mohamed Sahbi Nakhli

  2. LaREMFIQ Laboratory, University of Sousse, Sousse, Tunisia

    Mohamed Sahbi Nakhli

  3. IHEC, LaREMFiQ, University of Sousse, Sousse, Tunisia

    Abderrazak Dhaoui

  4. Ipag Business School (IPAG Lab), Paris, France

    Abderrazak Dhaoui

  5. IPAG Business School (IPAG Lab), Paris, France

    Julien Chevallier

  6. Université Paris 8 (LED), Saint-Denis, France

    Julien Chevallier

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  1. Mohamed Sahbi Nakhli
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  2. Abderrazak Dhaoui
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  3. Julien Chevallier
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Correspondence to Julien Chevallier.

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Nakhli, M.S., Dhaoui, A. & Chevallier, J. Bootstrap rolling-window Granger causality dynamics between momentum and sentiment: implications for investors. Ann Finance 18, 267–283 (2022). https://doi.org/10.1007/s10436-021-00399-z

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  • DOI: https://doi.org/10.1007/s10436-021-00399-z

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