Investor Sentiment and the Closed-End Fund Puzzle: Out-of-Sample Evidence

In this paper we examine the proposition that small investor sentiment, measured by the change in the discount/premium on closed-end funds, is an important factor in stock returns. We conduct an out-of-sample test of the investor sentiment hypothesis in a market environment that is more likely to be prone to investor sentiment than the USA. We fail to provide supporting evidence for the claim of Lee et al. (1991) that investor sentiment affects the risk of common stocks. Consistent with Elton et al. (1998), who show that investor sentiment does not enter the return generating process, our tests do not detect investor sentiment in a capital market that is more susceptible to small investor sentiment. Our results provide additional support against the claim that investor sentiment represents an independent and systematic asset pricing risk.