The linkage between aggregate investor sentiment and metal futures returns: A nonlinear approach

•This paper examines the linkage between investor sentiment and metal futures returns.•Metal futures perform better when investors are pessimistic rather than optimistic.•Metal futures returns exhibit asymmetric responses to positive and negative sentiment shocks.•There exists a negative predictive relationship between sentiment and metal futures returns.•The predictive effect of sentiment on metal futures returns is magnified in the high volatility state.

This paper examines the relationship between aggregate stock market sentiment and metal futures returns. Overall, metal futures have higher returns when investor sentiment is pessimistic rather than optimistic. Further analysis indicates that metal futures returns exhibit asymmetric responses to positive and negative investor sentiment shocks. Temporary and reactive demand shocks and flight to quality concerns may partially explain this asymmetry. In addition, there exists a negative predictive relationship between investor sentiment and metal futures returns, which remains persistent even after controlling for liquidity and open interest. Moreover, this predictive effect of sentiment on metal futures returns is magnified when there is high conditional volatility.