The Impact Of In Vestor Sentiment On The Return Of Stocks’ Previous High Momentum Strategy

Since the discovery of the momentum effect,scholars have been paying extensive attention to it.Momentum effect refers to the fact that asset prices will continue to move in the previous trend.Previous high momentum refers to the fact that stocks whose current prices are close to their previous highs will continue to rise in price.Many studies have tried to explain the causes of the previous high momentum effect from the perspectives of market conditions,economic policy stability,systemic risk and firm size.With the development of behavioral finance,scholars begin to pay attention to the influence of investors’ psychological factors on momentum effect and study the influence of behavioral deviation on momentum effect.Psychology believes that people have anchoring bias,that is,people often choose a reference point when making decisions,and then adjust their expectations and behavior based on this reference point.Adjusted for their own behavior,the previous highs of stock prices,as a simple and easily available information,become a reference point for many investors,which provides a new explanation for the momentum of the previous highs.This article aims to explore the impact of investor sentiment on momentum returns at previous highs.Firstly,using portfolio analysis,this article constructs a momentum strategy and tests the effectiveness of the previous high momentum strategy in the Chinese A-share market,confirming the existence of the previous high effect.Then,based on the investor sentiment index constructed in the article,investors’ sentiment is divided into positive,moderate,and negative periods,observing the momentum returns at previous highs under different sentiment states,and studying whether investor sentiment affects previous high momentum.By using Fama-Macbeth regression to form previous high momentum returns and then conducting a time series regression with investor sentiment to verify the results of portfolio analysis,the empirical results of this article show that when investor sentiment is high,previous high momentum returns are more significant,and the previous high momentum returns in the low sentiment period are negative in the regression analysis.In addition,this research result is robust even after excluding the January effect,considering market conditions and redefining sentiment states.This indicates that the previous high momentum strategy will be affected by investor sentiment and cannot generate momentum returns in all circumstances.When investor sentiment is high,it is more likely to exhibit behavioral biases,resulting in easier momentum returns for the previous high mom entum strategy.Based on the research above,this article proposes the following suggestions:Firstly,for investors,they should remain rational and calm when making decisions,avoid being overly optimistic or pessimistic,try to avoid the influence of anchoring bias,consider multiple factors comprehensively,and make reasonable investment decisions.Secondly,for financial regulatory agencies,they should fully consider the impact of emotional factors when conducting market supervision,actively improve market transparency,ensure that investors can obtain accurate and comprehensive information,and make more objective and accurate investment decisions.