Investor Sentiment and the Near-Term Stock Returns: Evidence from Chinese Stock Market

Using a vector autoregression (VAR) model, we study how investor sentiment and near-term stock returns interact each other. We find that both past market returns and sentiment are important determinants of investor sentiment. Sentiment has predictive power for near-term future stock returns. Our results suggest asset pricing models should consider the role of investor sentiment. In addition, our evidence does not support the conventional wisdom that sentiment primarily affects small stocks and extreme growth stocks, on the contrary, it appears that the stronger relationship exist between investor sentiment and large-cap value stocks in China A-share market.