This study provides new evidence on the predictability of confidence indices in China’s stock returns. We demonstrate that, during the sample period from 2005:01 to 2022:12, the business confidence index (BCI) positively and significantly predicted subsequent stock market returns, outperforming mainstream economic predictors and other confidence indices. Further, for the pricing effectiveness of the stock market, the BCI and investor sentiment provide complementary sources of information. The predictive power of confidence indices for stock market returns declined significantly during the COVID-19 pandemic. Meanwhile, confidence indices predicted better during bear market periods compared to bull market periods. Finally, in practical investment applications, the BCI and alternative confidence index produce appreciable economic gains for investors. These empirical results also pass the robustness test.
Xu et al. (Sun,) studied this question.