Can Investor Sentiment Be a Momentum Time-Series Predictor? Evidence from China
62 Pages Posted: 23 Mar 2017
Date Written: April 20, 2015
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
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