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Does investor sentiment predict stock returns? The evidence from Chinese stock market

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Abstract

This paper examines the proxy variables of investor sentiment in Chinese stock market carefully, and tries to construct an investor sentiment index indirectly. We use cross correlation analysis to examine lead-lag relationship between the proxy variables and HS300 index. The results show that net added accounts (NAA), SSE share turnover (TURN), and closed-end fund discount (CEFD) are leading variables to stock market. The average first day return of IPOs (RIPO) and relative degree of active trading in equity market (RDAT) are contemporary variables, while number of IPOs (NIPO) is a lagging variable of stock market. Using the sentiment proxy variables with most possible leading order, and forward selection stepwise regression method, the empirical results on monthly stock returns reveal that three leading proxy variables can be used to form a sentiment index. And the out of sample tests prove that this sentiment index has good predictive power of Chinese stock market, and it is robust.

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Authors and Affiliations

  1. School of Economics and Management, Beihang University, Beijing, 100191, China

    Hui Bu & Li Pi

Authors
  1. Hui Bu
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  2. Li Pi
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Corresponding author

Correspondence to Hui Bu.

Additional information

This research was supported by the National Natural Science Foundation of China under Grant Nos. 71003004 and 71373001.

This paper was recommended for publication by Editor WANG Shouyang.

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Bu, H., Pi, L. Does investor sentiment predict stock returns? The evidence from Chinese stock market. J Syst Sci Complex 27, 130–143 (2014). https://doi.org/10.1007/s11424-013-3291-y

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  • DOI: https://doi.org/10.1007/s11424-013-3291-y

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