Home and foreign investor sentiment and the stock returns

• We examine the French stock excess returns.
• We focus on the foreign and home components of investor sentiment.
• We use the total investor sentiment index of Baker and Wurgler (2006) and consider the closed-end funds discount as a measure of foreign investor sentiment.
• Foreign and home sentiments are strong contrarian predictors of stock returns.
• Equity home bias is an important component of investor sentiment.
• Only favorable sentiment matters in French stocks’ valuation.

We investigate the impact of home and foreign investor sentiment on stock returns. We use the total investor sentiment index of Baker 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.