Sentiment and uncertainty: Evidence from China

This study examines the predictive power of investor sentiment under varying levels of market-wide uncertainty by replicating and extending the framework of Birru and Young (2022). Consistent with their findings, our analysis demonstrates that sentiment most strongly predicts market returns during periods of heightened uncertainty. Expanding the investigation to the Chinese market, we identify a significant interactive effect between sentiment and uncertainty on both aggregate and cross-sectional returns across six- to twelve-month horizons. Overall, the findings underscore the critical role of sentiment in return predictability, particularly in high-uncertainty environments.