The Unbearable Lightness of Expectations of the Chinese Investor

The Chinese equities markets witnessed wild swings in 2014-2015. The stock market's impact on the Chinese economy, and in turn on the Federal Reserve's interest rate policy is indirect but significant. The high internet penetration of the Chinese population - about 670 million and growth in retail trading accounts may make predispose the market to investor herding. In this paper, investor sentiment is separately derived through the textual analysis of newswires and the social blogs, which are the general types of information fed to rational arbitrageurs and retail noise traders respectively. Through a state space model of index returns on the two types of sentiment, it is shown that social blog sentiment and its time varying sensitivities are most accountable for the index swings in 2014/15. This sensitivity to the blog sentiment decreased in June 2015, correlating with less volatility in stock prices. It remains to be seen if the market is less sentiment driven now