Investor sentiment and the cross-section of stock returns : evidence from China.
Date of Issue2012
College of Business (Nanyang Business School)
The thesis studies how investor sentiment affects the cross-section of stock returns in china stock market. I construct an investor sentiment index, which is based on the common variation in four underlying proxies for sentiment: turnover of tradable share, the number and average first-day return of IPOs, and the number of newly opened accounts. I predict that investor sentiment has more pronounced effects on stocks which are more difficult to value and riskier to arbitrage. Consistent with this prediction, I find that when sentiment is high (low), the returns are relatively higher (lower) for small size stocks, high volatility stocks, unprofitable stocks, and extreme growth stocks. When sentiment is low, these categories of stock earn relatively lower returns.