Sentiment Beta in China
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Sentiment Beta, and Asset Prices: Evidence from China
Fengjiao Lin; Zhigang Qiu
- Renmin University of China
- ?Renmin University of China - School of Finance
- ?School of Finance, Renmin University of China
Strategy in a nutshell
The investment universe comprises China A-Share stocks. Sentiment beta is estimated through a time-series regression (section 2.2 of the reference paper) using the following explanatory variables:
Market factor
Size factor
Value factor
Momentum factor
CICSI sentiment index
For each stock and each month, sentiment beta is defined as the regression coefficient on the sentiment index. Regressions are run on a rolling 36-month window, requiring at least 24 valid observations.
Stocks are then ranked by their sentiment beta and sorted into quintiles. The strategy goes long the lowest-quintile stocks and short the highest-quintile stocks, forming a value-weighted portfolio. Portfolios are rebalanced monthly.
Economic rationale
Unlike developed Western markets, the Chinese stock market is heavily dominated by retail investors, who often trade on sentiment rather than fundamentals. This structural feature creates opportunities for sentiment-driven anomalies.
The CICSI sentiment index provides a systematic way to capture investor mood and its effect on stock returns. Stocks with low sentiment beta are less sensitive to swings in investor sentiment and are therefore more resilient, while high-sentiment-beta stocks are more exposed to irrational retail-driven overreaction.
By systematically going long low-sentiment-beta stocks and shorting high-sentiment-beta stocks, the strategy exploits these inefficiencies. Profitability arises because sentiment shocks distort prices in predictable ways, which can be harvested by disciplined, factor-aware investors.