Investor sentiment and its nonlinear effect on stock returns—New evidence from the Chinese stock market based on panel quantile regression model

Abstract

This paper employs the panel quantile regression model to study the nonlinear effect of investor sentiment on monthly stock returns in the Chinese A-share stock market. The findings show that the influence of investor sentiment is significant from 1month to 24months. Its effect is asymmetric and reversal, that is, it is positive and large for stocks with high returns in the short term while negative and small in the long term. This reversal effect verifies the existence of a strong overreaction in the Chinese stock market. We also find that Chinese investors have notable cognitive bias and speculation tendency.