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A Principal Component Approach to Measuring Investor Sentiment in China

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Listed:
  • Chen, Haiqiang
  • Chong, Terence Tai Leung
  • She, Yingni

Abstract

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.

Suggested Citation

  • Chen, Haiqiang & Chong, Terence Tai Leung & She, Yingni, 2013. "A Principal Component Approach to Measuring Investor Sentiment in China," MPRA Paper 54150, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:54150
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Principal Component Analysis; Market Sentiment; Market Turnover; Threshold Model.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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