Abstract
In light of the increasing integration between China and Hong Kong, this paper develops a
new market sentiment index for the Hong Kong stock market, one of the largest stock market in the world. The
components of the sentiment measure includes the turnover ratio, short-selling volume, money flow, HIBOR
and return of the U.S. and Japanese markets. We also include the Shanghai and Shenzhen Composite index
in our measure to capture the influence of Chinese markets on the Hong Kong market. A threshold regression
model using the sentiment index as a threshold variable is estimated to capture the state of the Hong Kong
stock market. The result of Hansen (2000) likelihood ratio test divides Hong Kong’s stock market into three
regimes. It is shown that when our sentiment index is above (below) the upper (lower) threshold, the HSI
generally moves upward (downward). We also show that the trading rule which shorts (longs) the HSI or
S&P/HKEx LargeCapIndex when the sentiment index is above (below) the upper threshold value can beat the
buy-and-hold strategy.
Terence Tai-Leung Chong, Bingqing Cao, Wing Keung Wong. (2017) A Principal Component Approach to Measuring Investor Sentiment in Hong Kong, Journal of Management Sciences, Volume 4, issue 2.
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