A Study Of The Interactional Relationship Between The Investor Sentiment And The Returns In China's Stock Markets

While we often explain the fluctuations in stock markets by investor sentiment, how to measure it is a difficult issue. In this paper, a new method is used to measure investor sentiment, and attempt to probe into the relationship between the investor sentiment and the returns of the stock markets, and if the investor sentiment have the power to predict the market returns.In this thesis, I make a research on the interplay of the investor sentiment and the returns of China's stock markets over the past ten years. Firstly, the cause and conception of the investor sentiment are expatiated. Then, the indicators of the investor sentiment that suit China's stock markets are chosen. The market sentiment index is obtained through seven investor sentiment proxies by the factor analysis, and tests the market sentiment index available. Thirdly, I explore how the investor sentiment and the returns of China's stock markets influence each other, and strong evidences of co-movement between them are found. I find the returns have a positive influence on the market sentiment in the present period and 1 and 5 periods lag behind. And the market sentiment also has a positive impact on the returns on the next one and two periods, but, has a negative impact on the aggregated returns of the next five periods. The results prove that there exists the short-term positive influence between sentiment and stock market return and the long-term negative for the returns in China's Stock Markets, so investor sentiment is also an important factor related to asset valuation. I also find the returns of the big stocks have more positive impact on the near future market sentiment than the small stocks', and the aggregated returns experience a more negative impact by the market sentiment of five periods before; The returns of the low P/E ratio stocks has more positive impact on the near future market sentiment than the high P/E ratio stocks', but the aggregated returns of the high P/E ratio stocks endures a more negative effect by the market sentiment of five periods before. Finally, I use multidimensional investor sentiment indicators set up a vector space, and predict stock returns in three months by the Kalman filter. My tests show that investor sentiment has substantially predictive power for near-term future stock returns.