Investor Psychological and Behavioral Bias: Do High Sentiment and Momentum Exist in the China Stock Market?

Abstract

By using the relationship between high sentiment and momentum, the main purpose of this paper is to investigate if psychological biases of investors have an influence on behavioral biases. We find that in the China stock market, high sentiment of loser groups is correlated with contributors of momentum profits, while high sentiment of winner groups is correlated with contributors of contrarian returns. Further analysis indicates that, the higher the investor psychological bias is, the greater the momentum return will become. Winners/losers that are most sensitive to sentiment and having the longest duration of being kept under the situation will result in higher returns.