Home and foreign investor sentiment and the stock returns

We investigate the impact of home and foreign investor sentiment on stock returns. We use the total investor sentiment index of Baiter and Wurgler (2006) and consider the closed-end funds discount as a measure of foreign investor sentiment. Based on data of all the firms of the CAC All Tradable index over the period 2003 and 2013, we find that foreign and home sentiment are strong contrarian predictors of stock returns. This result supplies evidence that equity home bias is an important component of investor sentiment. In addition, we find that only favorable sentiment matters in French stocks' valuation. Our results are robust to the using of different measures of total investor sentiment. (C) 2015 The Board of Trustees of the University of Illinois. Published by Elsevier B.V. All rights reserved.