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Firm-specific investor sentiment for the Chinese stock market

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  • Li, Yan
  • Li, Weiping

Abstract

Investor sentiment plays a significant role in asset prices, and sieves out safer and speculative stocks, and captures institutional and retail investors’ demand shocks. Previous studies focus on the effects of investor sentiment in the developed stock markets using various sentiment metrics. We propose overnight and over-weekend returns as firm-specific investor sentiment (FSIS) to reflect retail investors’ beliefs about the developing Chinese stock market, and show that FSIS has short-term persistence, a negative relation with intraday returns and price impact, a U-shaped relation with trading activity, an inverse U-shaped relation with long-run performance and a positive impact on cross-sectional returns. FSIS captures the characteristics of the Chinese stock market with short-selling constraints, and market-level information of FSIS explains risk premiums from sentiment-driven mispricing. Our results also reflect the stronger-self remediability after the 2015 crash of the Chinese stock market.

Suggested Citation

  • Li, Yan & Li, Weiping, 2021. "Firm-specific investor sentiment for the Chinese stock market," Economic Modelling, Elsevier, vol. 97(C), pages 231-246.
    • Handle: RePEc:eee:ecmode:v:97:y:2021:i:c:p:231-246
    DOI: 10.1016/j.econmod.2021.01.006
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    6. Gao, Yang & Zhao, Chengjie & Wang, Yaojun, 2024. "Investor sentiment and stock returns: New evidence from Chinese carbon-neutral stock markets based on multi-source data," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 438-450.
    7. Liu, Jun & Wu, Kai & Zhou, Ming, 2023. "News tone, investor sentiment, and liquidity premium," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 167-181.
    8. Jiang, Yuexiang & Fu, Tao & Long, Huaigang & Zaremba, Adam & Zhou, Wenyu, 2022. "Real estate climate index and aggregate stock returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    9. Song, Ziyu & Yu, Changrui, 2022. "Investor sentiment indices based on k-step PLS algorithm: A group of powerful predictors of stock market returns," International Review of Financial Analysis, Elsevier, vol. 83(C).
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    More about this item

    Keywords

    Firm-specific investor sentiment; Overnight returns; Intraday return; Liquidity; Stock long-run performance; Cross-sectional stock returns; Sentiment-driven mispricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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