Abstract
We show the effect of investor anxiety on momentum in the Chinese stock market. In this market dominated by retail investors, we examine the momentum profits in 900 types of daily testing periods. We find prevalent price reversals in the long formation and holding periods in the Chinese A-share market. Compared to Goyal and Wahal (2015), Wang and Xie (2010), and Kang et al. (2002) who found no momentum, our novel finding from a daily basis is that the A-share market presents price momentum within the short formation and holding periods. We first test the momentum profits under different strengths of anxiety in the A-share market. The stocks held by the least anxious investors elicit the strongest price momentum, whereas the stocks held by the most anxious investors encounter much weaker price momentum in the A-share market. According to our empirical outcomes, the A-share market overall exhibits higher anxiety and weaker momentum, whereas the B-share market embodies milder anxiety and stronger momentum. From the results of single market and cross-market comparisons, the intrinsic anxiety of retail investors is an essential factor stimulating the Chinese stock market to be prone to price reversals.
Highlights
0.2376 −0.1715 is table presents the mean value of daily relative order imbalance (ROI) and accumulative relative order imbalance (ACCI) for the market as a whole. ey are obtained based on a daily basis
At is, the highest daily relative order imbalance still gives rise to the most significantly positive momentum profits. e highest daily relative order imbalance means that the stocks face the lowest selling pressure, implying the lowest instantaneous anxiety. is outcome suggests that the lowest instantaneous anxiety elicits the strongest price momentum in the very short run
We address the effects of investor anxiety on momentum in the Shanghai and Shenzhen stock exchanges from the perspectives of instantaneous anxiety and accumulative anxiety. e stocks held by the least anxious investors generate the strongest price momentum, while the stocks held by the most anxious investors stimulate much weaker momentum
Summary
1. Introduction is paper investigates the relationship between investor anxiety and momentum in the Chinese stock market. A series of studies dissect the effect of negative investor sentiment or disposable panic (e.g., [1–15]) Their endeavors on these topics have deepened our insights into the stock market, they do not directly detect the effect of anxiety. Price reversal implies that the past price trends of stocks will turn in opposite directions in the future, as the result of an overreaction to firm-specific information [20]. We would like to discuss how the changes in anxiety influence price momentum and reversal since these two characteristics of stocks come from underreaction and overreaction. Under the dilemmas of high market volatilities and information asymmetries, the dominant retail investors may exhibit anxiety and overreactions, eliciting the emergence of reversal. Even in the short formation and holding periods, there are still approximately
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