Abstract

This paper creates an investor sentiment index for the Chinese A-share stock market. We document the details of this index and use it to explain about asset pricing anomalies in the Chinese stock markets. We test the effect of investor sentiment on 13 asset pricing anomalies in the Chinese stock markets. Out of the 13 anomalies, 9 of them are significantly affected by investor sentiment. In particular, the factors of firm size (Size), total risk (Sigma), stock issuance growth (Issue), total accruals (Accruals), net operating assets (Opa), profit premium (Profit), growth of assets (GA), return on assets (ROA), and return on equities (ROE) are significantly positive, which mean that there are positive relations between market abnormal returns with lagged investor sentiment. Therefore, following high investor sentiment, the profits from a long-short strategy will be more and short leg portfolios will mostly provide gains at the same time. We consider the findings of this study to be not only an important supplementary of the Chinese A-share stock market to the existing theories on global investor sentiment, but also efficient strategies for investors to determine the movement of stock returns and make their investing decisions.

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