Market ambiguity, investor sentiment and market anomalies – Evidence from the Chinese A-share market

This study examines how market ambiguity and investor sentiment influence market anomalies in the Chinese A-share market. Prior literature indicates that market ambiguity and investor sentiment play critical roles in shaping investment behaviors and market anomalies. However, the specific mechanisms through which these factors interact remain unclear. We analyze a dataset comprising daily and monthly stock returns and fundamental information for 4587 A-share listed firms from 2003 to 2022. We select market anomalies based on emotional biases in investor decision-making under ambiguity and construct anomaly portfolios. We introduce market ambiguity as a moderating variable to study its interaction with investor sentiment. We find that market ambiguity significantly interacts with investor sentiment. During periods of pessimistic sentiment, ambiguity enhances the explanatory power of sentiment for market anomalies, while during optimistic periods, it diminishes this power. Furthermore, market ambiguity's moderating effect is stronger in environments with high information asymmetry compared to those with low information asymmetry. These findings suggest that market ambiguity amplifies the impact of investor sentiment on market anomalies, especially in conditions of high information asymmetry. This highlights the importance of considering both sentiment and ambiguity in understanding market behaviors and anomalies.