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Measuring Market Sentiment in Hong Kong's Stock Market

Author

Listed:
  • Ip-wing Yu

    (Research Department, Hong Kong Monetary Authority)

  • Chi-sang Tam

    (Research Department, Hong Kong Monetary Authority)

Abstract

Market sentiment is increasingly seen as a key factor driving the movement of asset prices. This paper develops two indicators to measure investors' attitude towards risk in the Hong Kong stock market: a) a risk appetite index and b) an investment sentiment index. We find that although the risk appetite index based on the work of Gai and Vause (2006) is able to capture episodes of extreme optimism and pessimism between 1996 and 2006, it is volatile and in some cases gives spurious signals. Our results also show that the investment sentiment indicator, a sentiment measure derived by combining the current realised return and the expected short-term return of the stock market, has adequate power to predict the subsequent return of the stock market over a period of 6 to 12 months.

Suggested Citation

  • Ip-wing Yu & Chi-sang Tam, 2007. "Measuring Market Sentiment in Hong Kong's Stock Market," Working Papers 0705, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:0705
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_05_full.pdf
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    Cited by:

    1. Eddie Chi-man Hui & Xian Zheng & Hui Wang, 2013. "Investor sentiment and risk appetite of real estate security market," Applied Economics, Taylor & Francis Journals, vol. 45(19), pages 2801-2807, July.

    More about this item

    Keywords

    risk appetite; risk aversion; market sentiment; Hong Kong stock market;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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