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

Xing Han, Youwei Li

Research output: Contribution to journalArticle

26 Citations (Scopus)
233 Downloads (Pure)

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.
Original languageEnglish
Pages (from-to)212-239
Number of pages28
JournalJournal of Empirical Finance
Volume42
Early online date13 Apr 2017
DOIs
Publication statusPublished - Jun 2017

Keywords

  • Investor Sentiment
  • Return Predictability
  • Bias Correction
  • China

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