IDEAS home Printed from https://ideas.repec.org/a/mes/emfitr/v60y2024i13p2907-2937.html
   My bibliography  Save this article

Can Investor Sentiment Explain the Abnormal Returns of Volatility-Managed Portfolio Strategy? Evidence from the Chinese Stock Market

Author

Listed:
  • Jie Zhou
  • Wei-Qi Liu
  • Jian-Ying Li

Abstract

This study develops a theoretical model to capture volatility-managed portfolios’ risk-adjusted returns affected by investor sentiment, and uses Chinese A-share market data to analyze the volatility-managed effect based on the small-minus-big (SMB) factor and explain the abnormal returns of volatility-managed portfolios from the investor sentiment perspective. Our results show that the Sharpe ratio of the SMB factor significantly increases after volatility management, especially in low-sentiment periods. Moreover, the mechanism analysis shows that in low-sentiment periods, small-cap stock investors overreact to volatility compared to large-cap stock investors, making the SMB factor significantly positively correlated with lagged volatility. Additional analyses show that volatility-managed portfolios constructed through stocks with gambling characteristics can achieve higher abnormal returns, and the abnormal returns of volatility-managed portfolios cannot be corrected by arbitrage traders as arbitrage is ineffective, reflecting the immaturity of China’s emerging capital market.

Suggested Citation

  • Jie Zhou & Wei-Qi Liu & Jian-Ying Li, 2024. "Can Investor Sentiment Explain the Abnormal Returns of Volatility-Managed Portfolio Strategy? Evidence from the Chinese Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 60(13), pages 2907-2937, October.
  • Handle: RePEc:mes:emfitr:v:60:y:2024:i:13:p:2907-2937
    DOI: 10.1080/1540496X.2024.2336064
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1540496X.2024.2336064
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/1540496X.2024.2336064?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mes:emfitr:v:60:y:2024:i:13:p:2907-2937. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/MREE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.