An Empirical Analysis On Domestic Investor Sentiment Index

Behavioral finance is an emerging and fast-developing academic topic in recent decades.Without much emphasis on the assumption of rational agent, behavioral finance interpretsthe functions of financial market more realistically on the base of traditional financial theory.Shedding more light on the study of investor psychology, behavioral finance clarifies that thebehavior and decision of investors can affect the asset-pricing and financial market. As aresult, the market is ineffectual.Investor sentiment is considered as the most important factor of investor psychology.Under this framework, it is very useful to study what factors influence the investor sentiment,and how investor sentiment influences the prospective stock returns. Therefore, this paperpresents the following approaches:Referring to the literature on investor sentiment, which has been demonstrated byresearchers from China and overseas, this paper has classified the existing investor sentimentindices according to their sources.Based on the classification, six investor sentiment indices were chosen and with respectto company's market capitalization, the stock in Chinese market was categorized intolarge-sized stock, middle-sized stock and small-sized stock. Subsequently, this paper hasstudied the relationship between investor sentiment indices and returns to stock in differentsize. This study has consequently found that only BSI index and ADR index could predictshort-term stock returns.This paper has also examined what factors can influence investor sentiment to concludethat the increase of return makes more investors bullish, but long-term high return couldproduce 'nervous bullish'. At the same time, this paper has found domestic investors are notsensitive to the volatility of stock return.