An Empirical Research On The Impact Of Investor Sentiment Caused By Monetary Policy On The Stock Market Volatility

Monetary policy transmission has always been a hot area of rearch in Academia.The traditional monetary policy theory suggests that under the premise of efficient market and rational investors,monetary policy can transimit to the real economy through the channels such as the interest rate,credit channel and the price of asset in order to achieve the goals of stabilizing price and maintaining economic development.A fundamental premise when economists discuss the effect of monetary policy transmission is that the investors are rational.The investors in the security market are ?Rational People? and the prices of the asset can reflect its basic value in the classical financial theory.But the emergence of various financial anomalies has brought the huge impact to the classical financial theory,which prompt economists to take further consideration about the basic assumptions of traditional financial theory.They thought that the real financial market is more complex and differs from the the assumption.And there is a growing evidence that financial market has has not totally run according to the classical financial theory assumes.Investors as the main participants of financial market whose psychology can affect their own behavior and further can affect the financial markets.Through the experiment contrasts,found that most investors are not the standard rational financial investors but behavioral investors.Meanwhile prospect theory was proposed.Since then behavioral finance began to grow.With the development of behavioral finance,Investors' irrational behavior has received the widespread attention.Professionals argued that Investors' irrational behavior will cause the volatility of the financial market and affect the investment behavior of the enterprise.So it's very important to research the role of the investor sentiment in the process of the monetary policy impact on the stock market volatility.It is necessary to further research the influnce of investor sentiment caused by the monetary policy on the stock market volatility because of the changes of the monetary policy can also cause the changes in investor sentiment.This research will be helpful for the central bank to make a more accurate prediction for the effect of the monetary policy when it makes monetary policy.And it will also be helpful for the central bank to make more accurate and efficient monetary policy.At the same time it also can provide investors with a certain theoretical reference.Based on the investor sentiment and the transmission of monetary policy,this paper firstly reviewed domestic and foreign literatures on the related theories and the empirical analysis about the influence of monetary policy on investor sentiment and the stock market volatility.Meanwhile the influnces of investor sentiment on the stock market volatility and monetary policy on the stock market volatility are introduced.Secondly,this paper discusses the related theories,including monetary policy theories and the theories of investor sentiment,defines investor sentiment.And the composite index of investor sentiment is constructed.Thirdly,this paper discusses the transmission that the influence of investor sentiment effected by the monetary policy on the stock market volatility.The main emphasis of this part are the transmission mechanisms that monetary policy affects the investor sentiment,investor sentiment affects the stock market volatility and the monetary policy affects the stock market volatility.Fourthly,the role of the investor sentiment in the process of the monetary policy effects the stock market volatility is tested.By comparing the results that considered investor sentiment with the results that not considered investor sentiment,it tests the effect of investor sentiment in the above process.Fifthly,this paper has carried on the empirical analysis about the influence of monetary policy on investor sentiment compared with the influence of it on Consumer Confidence Index.The reasonability of index of investor sentiment constructed in this article is confirmed.Meanwhile investor sentiment caused by the monetary policy has been estimated.Sixthly,the empirical analysis is carried on about the influence of investor sentiment on the stock market volatility.The points are the analysis on empirical results.Finally,to summarize the full text.The main conclusions of this paper are as follows:(1)Both in the periods of expansion and downturn of the stock market,investor sentiment can influnce the results that monetary policy affect stock market volatility.And this effect is asymmetric.(2)Both money supply growth and changes of the chinese reserve ratio have a significant effect on investor sentiment during the period of expansion and downturn of the stock market.And money supply growth has a larger effect than the changes of the chinese reserve ratio on investor sentiment.(3)Monetary supply growth in bull market periods has a larger effect on investor sentiment.But the changes of the chinese reserve ratio have no significant difference during the period of expansion and downturn of the stock market.(4)When the stock market is in a boom,investors' optimism makes the stock returns rise more largely than in a slump period.But stock market volatility reflects differently to the investors' optimism: investors' optimism heightens stock market volatility in a boom while in a slump period investors' optimism will not heighten the stock market volatility.In the long run,stock market volatility is still increasing.(5)The stock returns' rise in the stock market expansion has a larger effect on investor sentiment than in the stock market downturn,and the stock returns' rise can reduce the volatility of the stock market.Innovation points of this paper are as follows:(1)Composite investor sentiment index is constructed by using principal component analysis.(2)According to the specific situation of the Chinese stock market and the model,a one-staged noise trader model is constructed during the study of transmission Channel that investor sentiment impacts the stock market volatility.Based on this,we analyse the pathways that investor sentiment influences on China's stock market.(3)In the empirical analysis,China's stock market can be divided into two stages-the boom and the downturn.Based on this,empirical analyses are conducted as follows:(1)In the process of testing whether the investor sentiment can affect the results of monetary policy affect the financial market volatility,the investor sentiment factor is considered in the empirical model.To test the role of investor sentiment in this process,this paper research the different responses of the stock market returns and volatility to the shock of the monetary policy in consideration of investor sentiment and without investor sentiment by using Markov switching regime vector autoregression model.(2)Using the Markov switching regime model to research the asymmetric effect that monetary policy has on investor sentiment and consider the reflection of investors to the monetary policy in different stages of the stock market.At the same time by using regression analysis,the influence of investor sentiment affected by monetary policy is extracted.(3)When doing the empirical analysis of the impact of investor sentiment on the stock market volatility,model is used to research the dynamic relationship among the investor sentiment,the stock market returns and the stock market volatility.The effect that investor sentiment has on the stock market volatility is discussed in the different stages of the market.