Predicting stock returns with macroeconomic indicators, & Google svi & news sentiment

Abstract

Along the history of humankind, predicting future is the key of success in any area of science and business. After assimilating through mentality fasting and future oriented, investment is getting more important for people. An environment has been formed that meets investors and entrepreneurs. Saving transform into investments and create momentum in the economic growth. In the early ages of traditional finance, investors are making evaluation according to expected cash flow even if they are not aware of the methodology that they applied. After introduction of risk factor to investment decision, CAPM, EMH and APT has been developed to be used in investment decision making. The underlying rational investor assumption of this theories make them vulnerable to explain all movements in stock markets. Biggest criticism through EMH is to assume all parties in the market has been informed at the same level and new information diffuse all parties at the same level instantly. As a result of this assumption, nobody in the market can make additional profit over the given output calculated over expected future price, discount rate and dividends. On the contrary one-way movement in the markets would be available and yield to collapse of financial system. Sense of data and evaluation changes according to many social, genetic and intellectual property that they accumulated in wisdom. It is absolute reality that all investors are not rational and could not make sensible decisions at any time. Even if there is one macroeconomic environment with same set of data for anyone, It make differentiate person by person to capture and evaluation of it. Marginal satisfaction of investor from each unit of earning and marginal disfavor from each unit of loss depends on investor' s sense of profit/loss, available prosperity and a few more objective & subjective factors too. All these hidden effects subject to behavioral finance. Cognitive process, is the basis of behavioral finance, is to rely on perceiving processing and evaluation of data and process decision making. Somehow described as gut feeling in older times, nowadays denominated as investor sentiment and investor attention is the one of the main driver of asset pricing. Investor decision is not depending on one hundred percent to mathematical formulation, especially when uncertainty and volatility is at stake. Basic instinct plays important role in that circumstances. In real life, many people prefer certain earnings to fair gambling and thereby expected value mentality cannot be applicable to real life. So, besides of risk aversion tendency, imprinting, random consistency, overconfidence, optimism and wishful thinking, representativeness are the main behaviors of investors applied in investor decisions that yields bubbles, price abnormalities beyond intrinsic values of them.