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Retail investor sentiment in China

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  • Zhang, Yuntian
  • Zhang, Yongjie
  • Lin, Shen

Abstract

This paper introduces a stock-level sentiment measure, “Retail Flows” (RF), and evaluates its ability to price anomalies and mutual-fund performance in China. We extend a standard model to a setting with strict short-sale constraints and retail dominance, providing a microfoundation for why cross-sectional variation in RF reflects retail sentiment and yields testable pricing predictions. We then construct Outflow-Minus-Inflow (OMI) by shorting high-RF stocks and going long low-RF stocks, and benchmark OMI against the PMO factor of Liu, Stambaugh and Yuan (2019). Empirically, OMI delivers an average monthly excess return of 1.03% that remains unexplained by established Chinese factors. A four-factor model including OMI better explains prominent Chinese anomalies, accounts for 30% of aggregate mutual-fund excess returns, and explains 70% of performance of mutual fund momentum. Because daily price limits frequently distort prices and turnover, RF captures stock-level retail sentiment more reliably than abnormal turnover, helping to explain OMI’s superior pricing performance in China.

Suggested Citation

  • Zhang, Yuntian & Zhang, Yongjie & Lin, Shen, 2026. "Retail investor sentiment in China," Research in International Business and Finance, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:riibaf:v:84:y:2026:i:c:s0275531926000425
    DOI: 10.1016/j.ribaf.2026.103315
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