International investor sentiment and stock returns: Evidence from China

With the accelerated opening up of China's financial sector, international investors have increasingly become a key investment group. To describe the international investor sentiment towards Chinese stock assets, we select sentiment proxies from the transaction data in the China A-share market, the Hong Kong stock market, and the US market and aggregate the information from four proxies by principal component analysis. We propose this newly synthesized index as the International Investor Sentiment Composite Index for the Chinese stock market. The results show that international investor sentiment has significant predictive power for the future returns of the Chinese stock market. We also find that international investor sentiment has asymmetric prediction characteristics, and negative international investor sentiment has a more significant impact on stock returns than positive investor sentiment. Furthermore, using the copula model, we show that there is an asymmetric tail correlation between the International Investor Sentiment Index and future market returns, and international investor sentiment also has an early warning label effect on the extreme market conditions. Therefore, this paper will extend the existing literature about the role of international investor sentiment on asset prices on a global scale.