This paper investigates the investor trading behavior and the relationship between investor sentiment and stock returns. First we explore whether individual investors behave as the Disposition Effect stated — hold their losers too long while realize their winners too soon. Second, we apply four sentiment indicators — number of recommended stocks, margin purchase value, net fund redemption and odd-lot trade value — to examine relationship between investor sentiment and stock returns. We would like to see if past returns have anything to do with current sentiment, and if sentiment provides predictive power to future returns.

First of all, from our analysis to over eight hundreds cash accounts trading records in two research periods, January to March and September to December in 2000, we found the Disposition Effect holds in average but not statistically.

Second, the number of recommended stocks, weighted number of recommended stocks, margin purchase value, change in margin purchase value, net fund redemption and odd-lot trade value as proxies of investor sentiment are good at measuring the effect of past 4-week and 26-week returns on sentiment.

Third, the margin purchase value, net fund redemption and odd-lot trade value provide predictive power to future 26-week returns in our study, which also implies there is likely underlying mean-reversion within half year during the research period.

　Finally, exploiting the change in margin purchase value as proxy of investor sentiment, we found the past 4-week returns volatility is inversely related with the indicator. That is, investors are scared on facing with high returns volatility.

*Papers written in English
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