Investor Sentiment And Stock Price Volatility Study

Traditional finance theory does not study the effects of investor sentiment on stock performance. However, Investor sentiment plays a significant role under the framework of behavior finance.Investor sentiment could be considered as over or under-reaction towards information, which causes biased expectation. In the past studies, direct and indirect sentiment proxies are used to test the explaining and predictive power of sentiment on stock performance. In this paper, we choose 4 indicators as sentiment proxies to test the relationship between investor sentiment and stock returns in China. We find that investor sentiment, to some extent, could explain present returns, but fails to predict returns in the next period. And we also find that sentiment change would cause buying / selling pressure and then affect stock prices temporarily. The degree of this temporary effect depends on the following two factors: the scale of tradable shares and the type of investor sentiment (institutional investors' sentiment or individual investors' sentiment).