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The early‐warning system of stock market crises with investor sentiment: Evidence from China

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  • Rengui Zhang
  • Xueshen Xian
  • Haowen Fang

Abstract

Using a database of the trading data in the Chinese stock market over January 2005 to June 2012, this paper studies the stock market crisis based on the perspective of behavioural finance. Investor sentiment is based on B‐W method, and the possibility of the Shanghai stock market crisis was predicted by the logit model. The empirical results show that investor sentiment, which is more significant than the macroeconomic variables, has a significant positive impact on stock market crisis after controlling for the economic variables. Moreover, our results offer an empirical explanation for the financial anomaly of mean reversion. Both in‐sample and out‐sample data tests show that the logit model with investor sentiment is able to predict stock crises.

Suggested Citation

  • Rengui Zhang & Xueshen Xian & Haowen Fang, 2019. "The early‐warning system of stock market crises with investor sentiment: Evidence from China," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(1), pages 361-369, January.
    • Handle: RePEc:wly:ijfiec:v:24:y:2019:i:1:p:361-369
    DOI: 10.1002/ijfe.1667
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    Cited by:

    1. Mpho Bosupeng & Janet Dzator & Andrew Nadolny, 2019. "Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds," JRFM, MDPI, vol. 12(2), pages 1-26, June.
    2. Mpho Bosupeng & Janet Dzator & Andrew Nadolny, 2019. "Wechselkursfehlausrichtung und Kapitalflucht ab Botswana: Ein Cointegrationsansatz mit Risikoschwellen [Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Ri," Post-Print hal-02168726, HAL.
    3. Ahmed, Walid M.A., 2020. "Stock market reactions to domestic sentiment: Panel CS-ARDL evidence," Research in International Business and Finance, Elsevier, vol. 54(C).
    4. Anastasiou, Dimitris & Drakos, Konstantinos & Kapopoulos, Panayotis, 2022. "Predicting international tourist arrivals in Greece with a novel sector-specific business leading indicator," MPRA Paper 113860, University Library of Munich, Germany.
    5. Bin Xu & Boqiang Lin, 2021. "Large fluctuations of China's commodity prices: Main sources and heterogeneous effects," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2074-2089, April.

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