A Principal Component Approach to Measuring Investor Sentiment in China
Haiqiang Chen, Terence Tai Leung Chong, Yingni She
Quantitative Finance
#002214 20131205 (published)
This paper develops a new investor sentiment index for the Chinese stock market. The index is constructed via the principal component approach (PCA), taking six important economic and market factors into consideration. The sentiment index serves as a threshold variable in a threshold autoregressive model to identify the stock market regimes. Our findings show that the Chinese stock market can be divided into three regimes: namely, a high-return volatile regime, a low-return stable regime and a neutral regime. The sentiment index is shown to have good out-of-sample predictability.
JEL-Codes: C43, G14
Keywords: Principal Component Analysis; Market Sentiment; Market Turnover; Threshold Model.

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