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Journal of Management Sciences - Volume 4, Issue 2 2017
By Terence Tai-Leung Chong, Bingqing Cao, Wing Keung Wong
10.20547/jms.2014.1704206
Keywords: Principal component analysis; market sentiment; CSI 300; threshold model
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 \citeA{hansen2000sample} 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.