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Salience theory, investor sentiment, and commonality in sentiment: Evidence from the Chinese stock market

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  • Hu, Zhijun
  • Sun, Ping-Wen

Abstract

Investors pay more attention to a stock when the absolute return difference between the stock and the market is substantial, and consequently investors overweight this salience attribute when assessing the expected payoff from the stock. We demonstrate that the salience theory measure, which reflects this phenomenon, serves as a reliable proxy for firm-level investor sentiment and that the aggregate salience theory measure effectively represents market investor sentiment in the Chinese stock market. Furthermore, our findings reveal that the quintile portfolio with salient upsides underperforms the one with salient downsides by 1.26% (1.19% after risk adjustment) per month from 2002 to 2021. Moreover, we illustrate that the investor sentiment component of the salience theory measure significantly contributes to the negative salience premium. Finally, we provide evidence that the commonality in sentiment is priced significantly and positively, even after we control for the salience theory measure, firm risk characteristics, and lottery characteristics.

Suggested Citation

  • Hu, Zhijun & Sun, Ping-Wen, 2024. "Salience theory, investor sentiment, and commonality in sentiment: Evidence from the Chinese stock market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    • Handle: RePEc:eee:beexfi:v:42:y:2024:i:c:s2214635024000492
    DOI: 10.1016/j.jbef.2024.100934
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    More about this item

    Keywords

    salience theory; investor sentiment; comovement; expected return; China;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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