Investor Sentiment And Stock Return

Investor sentiment is an important part of behavioral finance. According to behavioral finance theory, investor sentiment and stock return are interrelated closely, that investor sentiment can influence the investment decision which would impact the stock return, and in return, the volatility of stock return can act on investors and cause the sentiment change. Under this theoretical framework, the paper studies the relationship of investor sentiment and stock return in Chinese A-share market.The paper constructs a composite index as measurement of investor sentiment. There are a lot of stock in A-share market and the total amount of stock changes over time. So, with the classification of sample stock based on different standards, the paper constructs a range of stock portfolios which are used to substitute for the stocks that have the similar features. The paper consists of five chapters. Chapter one is the introduction, showing the background, significance, thought of the study, reviewing previous research and pointing out the innovation of the paper. Chapter two constructs the composite index to measure investor sentiment of A-share market. Chapter three is about the empirical study on the influence of investor sentiment on stock return with econometric model. Chapter four mainly studies the dynamic relationship of investor sentiment and stock return. Chapter five introduces the conclusions, policy suggestions and prospect of further study.The main conclusions are reduced into the following three points.To improve the existing indefinite definition of investor sentiment, the paper proposes several connotations that should be considered. The composite index constructed by proxies of part investor sentiment can reflect the investor sentiment of market. The macroeconomic factors should be eliminated in the measurement of investor sentiment.Investor sentiment has positive influence on stock return. The stage characteristics are significant. Specifically, on the rising stage of market, the influence of investor sentiment on stock return is most significant while on the horizontal and falling stage of market, the effect is relatively little. Besides, the influence of investor sentiment on stock return that has different features is obviously different. For example, when investor sentiment increases, the stocks that have medium P/E, low return volatility, low ratio of tradable shares, low price and the optimal ratio of major stockholder shares will strengthen greatly, resulting in more profit in current period.There exists dynamic relationship between investor sentiment and stock return. Moreover, the interaction of investor sentiment and stock return is obviously asymmetric.First, the influence of market return on investor sentiment and increment of investor sentiment is obviously positive. Second, the influence of investor sentiment on stock return is asymmetric. Higher investor sentiment has an obviously positive impact on stock return while lower investor sentiment has a weak impact on stock return. The good news plays greater impact on investor sentiment. In comparison with the influence of investor sentiment on stock return, the influence of stock return on investor sentiment is greater.