Study On The Effects Of Investor Sentiment On Momentum Effect In The Stock Market

Many researches points out that there are a lot of "market irrational reactions" in the stock market, momentum effect and reversal effect for example. Because the actual situation of the stock market cannot satisfy the basic assumptions of the traditional finance theory, studies on the momentum effect and other market irrational reactions based on the behavioral finance theory were proposed. Meanwhile, the results of studies point out that investor sentiment, which is the main research direction of behavioral finance theory and the important factor of investor psychology, can affect the stock market. So it is very important to study the effects of investor sentiment on momentum effect in the stock market. In this paper, we will consider the investor sentiment and the momentum effect at same time, and the trading volume and firm size will also be introduced in the study of momentum effect.Firstly, the background, the structure and the significance of the paper are proposed. Secondly, studies on the effects of investor sentiment on stock market, the researches on momentum effect in the stock market, and the effects of investor sentiment on momentum effect are summarized. Thirdly, a composite investor sentiment index is constructed by choosing five single indexes such as discount of closed-end fund, numbers of new accounts, turnover, first day return of IPO and consumer confidence index. Then, we test the momentum effect in the stock market by using the overlapping sample method of Jegadeesh and Titman (1993). Lastly, taking the related date about investor sentiment index, return of A-share stocks between January 2001 and October 2012 as the empirical samples, and using the same method, we study the momentum effect at different investor sentiment states, and the momentum effect at different investor sentiment states based on the different trading volume and company size. The empirical results show that:(1) From the result of testing the momentum effect in the stock market, we find that there is significant reversal effect in short-, medium-and long-term stock market.(2) Using the constructed investor sentiment index, we study the effects of investor sentiment on the momentum effect in the stock market and find that the momentum effect is different at different investor sentiment states. It means that investor sentiment affects the momentum effect indeed.(3) At the condition of trading volume or company size, it turns out that the effects of investor sentiment on the momentum effect of different trading volume (company size) stock portfolio is different, and both trading volume and company size are the main factors which affects the results of the study. And the effect of investor sentiment on momentum effect is proved again.