Chinese Investor Sentiment Index Measurement And Analysis Of Its Impact On Stock Market Returns

With the development of global capital market, many market anomalies exist in every country capital markets in recent years, such as Small-firm Effect, Disposition Effect, Book-to-Market Effect, Momentum Trading Strategy and Contrary Investment Strategy. However, these anomalies can't be explained by the traditional finance very well. Many basic assumptions in traditional finance such as rational investors and effective market are questioned by more and more people. Theorists and empirics pay more and more attention to behavioral finance recently. This paper studies the measure methods of investor sentiment and how investor sentiment affecting the cross-section of stock returns.This paper reviews the domestic and foreign scholars' research on the results of investor sentiment, and uses quantitative investor sentiment indicator variables to construct investor sentiment index on the basis of a principal component. From the univariate and multivariate regression analysis between the cross-section of stock return and investor sentiment index, we demonstrate that investor sentiment is one of the most important Asset Pricing factors.This paper includes five chapters. Chapter 1 (Review) introduces a research background, contents and significance, the framework of this paper, and finally pointed out the main innovation. Chapter 2 includes literature review concerning the methods of investor sentiment measurement, and investor sentiment research empirical findings. Chapter 3 is about the research design. It details description of the data sources and sample selection, the definition and calculation of research variables, theoretical analysis and research supposition, research procedures. The content of Chapter 4 is description and analysis of the empirical results. At first it introduces descriptive statistics and analysis of research data samples, then tests the single variable and multi-variable regression of investor sentiment index and cross-sectional stock returns, and comparing these results together and adding shorter term data to make a deeper analysis. Chapter 5 is the conclusion of the study and enlightenment in this paper, and puts forward the limitations of this study, makes recommendations on the improvement direction of follow-up studies.The main conclusion getting from this empirical research paper is that Chinese investor sentiment effects cross-sectional stock returns significantly. However, different financial characteristics companies are influenced differently. In addition, this article use three different research cycle (month, week, day), the findings can be used to explain the "reverse effect" in Chinese stock market.The author believes that Chinese investors are not very mature generally. Their investment decisions are easy to be influenced by their sentiment, thus causes stock market fluctuating non-rationally. On the one hand, investors should adhere to long-term value investment philosophy; On the other hand, educating investor activity should become the important means of the Supervisory department implementing the marketability regulation to guide the market to return rationality by the most temperate way, in order to realize our country capital market sustainable long-term prosperous.