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Does Investor Sentiment Affect the Momentum and Reversal Effect?-- Based on Chinese SSE A-share Market

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DOI: 10.23977/ferm.2022.050502 | Downloads: 26 | Views: 726

Author(s)

Lemeng Shi 1, Jiarui Li 1

Affiliation(s)

1 Xiamen University, Xiamen, Fujian, 361000, China

Corresponding Author

Lemeng Shi

ABSTRACT

The momentum and reversal effect are two of the common "anomalies" in the stock market. However, whether they exist in Chinese stock market and how they influence investor sentiment have not been determined, and the empirical research on them is not deep enough. Based on this, the paper uses the monthly returns of SSE A-share from April 2014 to April 2020 and divides this sample period into optimistic period and pessimistic period through the Comprehensive Sentiment Index CICSI and empirically tests the influence of investor sentiment on these two effects. Considering the potential influence of stock market turbulence, the sample period is divided into stable period and turbulent period to further explore. The results are as below. Firstly, SSE A-share has significant reversal effect, but it only exists in the short term. Secondly, the state of the stock market plays an important role in generating the reversal effect and it appears more frequently in turbulent period. Thirdly, these two effects are closely related to investor sentiment. The probability of the momentum strategy and reversal strategy's excess returns in optimistic period is greater than that in pessimistic period. Lastly, investor sentiment has heterogeneous influence on the momentum effect and reversal effect under different market states. Based on the empirical results, the paper introduces turnover rate as a classification indicator to construct a new portfolio and further explores the possibility of using the momentum and reversal strategy under the influence of two sentiment periods to obtain stable excess returns.

KEYWORDS

Momentum effect, Reversal effect, Sentiment index, Market state, Chinese a-share market

CITE THIS PAPER

Lemeng Shi, Jiarui Li, Does Investor Sentiment Affect the Momentum and Reversal Effect?-- Based on Chinese SSE A-share Market. Financial Engineering and Risk Management (2022) Vol. 5: 8-16. DOI: http://dx.doi.org/10.23977/ferm.2022.050502.

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