This study examines whether sentiment indices predict individual firms’ stock returns and evaluates the performances of sentiment-based trading strategies. Both the sentiment indices constructed using the principal component analysis (PCA) and overnight stock returns positively predict stock price movements, whereas the news sentiment does not significantly determine future stock returns. Comparing portfolio performances among sentiment indices, the long-short equity strategy based on PCA sentiment changes yields the highest return, which is not explained by well-known risk factors. Investors may further gain greater profits by considering multiple sentiment measures when constructing portfolios, suggesting that each measure represents somewhat different aspects of investor sentiment.​

KEYWORDS: Cross-sectional stock returns; Investor sentiment; Portfolio management; Return predictability; Trading strategy

JEL Classifications: G10; G11; G40