Can Investor Sentiment Be a Momentum Time-Series Predictor? Evidence from China

62 Pages Posted: 23 Mar 2017

See all articles by Xing Han

Xing Han

University of Auckland Business School; Ghent University - Department of Financial Economics

Youwei Li

Hull University Business School

Date Written: April 20, 2015

Abstract

This paper challenges the prevailing view that investor sentiment is a contrarian predictor of market returns at nearly all horizons. As an important piece of "out-of-sample" evidence, we document that investor sentiment in China is a reliable momentum signal at monthly frequency. The strong momentum predictability is robust under both single- and multi-regressor settings, and is statistically and economically significant both in and out of sample, enhancing portfolio performance as shown by our numerical examples. More importantly, we find a striking term structure that local sentiment shifts from a short-term momentum predictor to a contrarian predictor in the long run. Cross-sectional analysis reveals that sentiment is more of a small-firm effect. Finally, we confirm that global sentiment spills over to the local Chinese market, as it predicts negatively future returns over the longer horizons and in the cross section.

Keywords: Investor Sentiment, Return Predictability, Bias Correction, China

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Han, Xing and Li, Youwei, Can Investor Sentiment Be a Momentum Time-Series Predictor? Evidence from China (April 20, 2015). Available at SSRN: https://ssrn.com/abstract=2938886 or http://dx.doi.org/10.2139/ssrn.2938886

Xing Han (Contact Author)

University of Auckland Business School ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Youwei Li

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

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