Sentiment-based momentum strategy

Abstract

In this paper, we examine whether momentum profits can be predicted by sentiment and whether the momentum profit predictability is exploitable for investors. To this end, we use a novel approach by proposing a new momentum strategy that relies on the ability of sentiment to predict future momentum profits. We apply the new strategy to actual equity data and find that the new momentum strategy significantly outperforms the conventional momentum strategy. Our result more strongly supports the momentum profit predictability than usual linear predictive regressions suggest. We also present evidence that the outperformance of the new method over the conventional one is robust to various specification changes.