Investor Sentiment and Bond Risk Premia: Evidence from China

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This article shows the statistical signi?cance of a set of variables related to market sentiment and uses them to predict the risk premium embedded in China's sovereign bonds. We construct a composite index of market-wide investor sentiment as a linear combination of proxies for a degree of market participation and risk appetite of investors. Further, we show that these sentiment-related factors can be summarized in a single-return forecasting factor, similar in a spirit of Cochrane and Piazzesi (2005). Our empirical results show that this sentiment factor has predictive power beyond that contained in the yield curve and macroeconomic variables, and this predictability is robust for out-of-sample testing. In addition, the predictive power of the sentiment factor shows relevance during the 2008 global financial crisis, indicating that the forecasting ability of investor sentiment is mainly derived by a sentiment-induced "flight-to-quality.
Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
Issue Date
2019-03
Language
English
Article Type
Article
Citation

EMERGING MARKETS FINANCE AND TRADE, v.55, no.4, pp.915 - 933

ISSN
1540-496X
DOI
10.1080/1540496X.2018.1466276
URI
http://hdl.handle.net/10203/248653
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