Can investor sentiment be a momentum time-series predictor? Evidence from China
- Publication Type:
- Journal Article
- Citation:
- Journal of Empirical Finance, 2017, 42 pp. 212 - 239
- Issue Date:
- 2017-06-01
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| Filename | Description | Size | |||
|---|---|---|---|---|---|
| 1-s2.0-S0927539817300300-main.pdf | Published Version | 1.97 MB |
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© 2017 Elsevier Ltd 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.
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