Effects Of Investor Sentiment On Anomalies In Chinese Stock Market

In order to study influences of investor sentiment on three anomalies, turnoveranomaly, PE anomaly and reversal anomaly in Chinese market, this paper appliesNOAN, CEFD, CCI, market PE and market turnover rate to construct Chinese InvestorSentiment Index (CISI) and CISI eliminated by macro variables. For both indexes, thepaper draws same conclusions.First, the three anomalies do exist in China, and PE strategy is the least profitable.Besides, because of extremely strict shorting rules, short-legs are not significantlynegative.Second, investor sentiment has positive effects on PE and turnover effect. Returnsof long-legs and long-short spreads in turnover strategy are significantly positive inboth high-and low-sentiment periods. Although the differences of high-andlow-sentiment periods are only significantly positive at10%level, it does show thatinvestor sentiment has positive influence on long-legs. Besides, long-short spread hashigher return in high-sentiment periods, which corresponds well with predictiveregressions. PE strategy’s results are similar with turnover strategy, except that itslong-legs and long-short spreads are all not significantly positive in low-sentimentperiods, which is caused by PE strategy’s relatively lower returns in China.Third, reversal strategy’s long-legs and long-short spreads are significantlypositive in both periods, but they do not show significantly differences in high-andlow-sentiment periods. Explanation is given from the aspect that Chinese irrationalinvestors’ speculating habit, which is not influenced by investor sentiment.Forth, compared to reversal strategy, turnover strategy yields higher returns inhigh-sentiment period, while lower returns in low-sentiment period, no matterlong-legs or long-minus-shorts.To sum up, investors can use this month’s CISI to predict next month’s investorsentiment and apply certain strategies in different periods.