Can investor sentiment be a momentum time-series predictor? Evidence from China

Han, Xing; Li, Youwei

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.

Citation

Han, X., & Li, Y. (2017). Can investor sentiment be a momentum time-series predictor? Evidence from China. Journal of Empirical Finance, 42, 212-239. https://doi.org/10.1016/j.jempfin.2017.04.001

• Journal Article Type: Article
• Acceptance Date: Apr 5, 2017
• Online Publication Date: Apr 13, 2017
• Publication Date: 2017-06
• Deposit Date: Mar 19, 2019
• Publicly Available Date: Mar 21, 2019
• Journal: Journal of Empirical Finance
• Print ISSN: 0927-5398
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 42
• Pages: 212-239
• DOI: https://doi.org/10.1016/j.jempfin.2017.04.001
• Keywords: Investor sentiment; Return predictability; Bias correction; China
• Public URL: https://hull-repository.worktribe.com/output/1113426
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0927539817300300?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Can investor sentiment be a momentum time-series predictor? Evidence from China; Journal Title: Journal of Empirical Finance; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jempfin.2017.04.001; Content Type: article; Copyright: © 2017 Elsevier B.V. All rights reserved.
• Contract Date: Mar 21, 2019