Measuring Market Sentiment in Hong Kong's Stock Market

Ip-wing Yu and Chi-sang Tam
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Ip-wing Yu: Research Department, Hong Kong Monetary Authority
Chi-sang Tam: Research Department, Hong Kong Monetary Authority

No 705, Working Papers from 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.

Keywords: risk appetite; risk aversion; market sentiment; Hong Kong stock market (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2007-04
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Citations: View citations in EconPapers (1)

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