A Study On The Relationship Between Investor Sentiment And Excess Returns Of Various Investment Stratagies

This paper mainly tests the relationship between four long-short portfolio excess return and investor sentiment in both China and America stock market.Firstly,we have built a variety of investment strategies according Size,book-to-market ratio,price momentum and residual momentum effect.Besides,the new variables--cumulative changes in investor sentiment have been constructed on the basis of investor sentiment index,so that the portfolio excess return can be fully observed in the early,middle and late sentiment bubble.Through various studies,we have found that portfolio excess return not only has a linear relationship with investor sentiment level,but also a.nonlinear relationship with cumulative changes in invest sentiment,and the latter relationship is more significant and robust than the former.At the same time,we have found the similarities and differences between China and the U.S.stock market at different times.The difference is that China stock market investor sentiment level has no significant influence on these four investment strategy excess return,but the U.S.stock market is on the opposite.This indicates that the method by which using investor sentiment to explain or forecast return in the US is not applicable in China.One of the similarities lies in the fact that the return of all the portfolios increases with the rising of cumulative changes in investor sentiment.As the sentiment bubble persists and reaches a certain value,price corrections will follow and lead return to reverse.What's more,portfolios which are opaque and with high trading frictions(like small size,high book-to-market ratio and price momentum winner portfolios)are more easily influenced by investor sentiment than transparency and low-trading-friction portfolios(like big size,low book-to-market ratio and price momentum loser portfolios).As a result,the fitting curves featuring the relationship between strategy subsequent return and cumulative changes in investor sentiment are different.Investors can use fitting curves to roughly observe the perfect timing to "ride the bubbles",namely maximizing the expectant benefit by choosing the right point of sentiment cumulative changes.