News sentiment indicators and the cross-section of stock returns in the European stock market

This paper investigates whether the Bloomberg investor sentiment index can provide valuable information for investors and fund managers for the purposes of stock picking and portfolio selection. The dataset consists of all the listed companies in the Euro area for the period from 2010 to 2021. By exploiting portfolio sorting strategies, the paper evaluates to what extent and for how long investor sentiment can affect stock returns. Moreover, it considers whether additional factors can affect the relationship between sentiment and returns, casting light on the asymmetric effect related to positive and negative news. The findings are as follows. First, high (low) sentiment stocks exhibit high (low) returns on average. Second, the predictability of stock returns holds for at least three months. Third, the market is less efficient in relation to small capitalization stocks compared to big ones. Fourth, positive news is factored into the stock price more slowly than negative news. Finally, sentiment is a priced factor in the cross-section of stock returns.