The momentum effect in the Chinese market and its relationship with the simultaneous and the lagged investor sentiment

Abstract

Motivated by the lack of investigation on the behavioral interpretation on the momentum premium, this paper addresses this issue by focusing on the effect of investor sentiment on a sample of the comprehensive Chinese A-share index covering the period from 2006 to 2015. Expect for uncovering the momentum effect in the A-share market by calculating the momentum returns of ten zero-cost portfolios differed on the formation period, we compare the momentum returns under different sentiment states during the sample period. The difference is obvious that the momentum returns are more evident during the optimistic sentiment period where estimated investor sentiment is over zero. This paper also examines whether the investor sentiment explains the momentum returns and its predictive power on the subsequent momentum premiums. We find the contemporaneous linear relationship between investor sentiment and the momentum returns is less pronounced. Even the slopes of sentiment are positive, only three of them are significant. However, the investor sentiment exhibits strong predictability on future returns of momentum strategy in the short-run, suggesting it can be a contrarian predictor of expected returns of momentum in the short-run