Investor Sentiment And China’s Shanghai Composite Stock Market Empirical Study

Behavioral finance theory suggests that investors ’behavior and decisions will affect investors’ decisions, thereby affecting the stock returns; the other hand, the market’s ups and downs will make the person’s mood changes, that is market returns will also affect investor sentiment. This article study the mutual influence relationship between the China’s investor sentiment and stock returns based on the Chinese A-share market.There are two measures to construct the investor sentiment,direct indicators and indirect indicators, as integrated indicators is a more comprehensive way, so this paper use this method, using principal component analysis to construct a composite indicator of investor sentiment, and then choose the Shanghai Composite Index which is more recognized by China’s market to study the interaction between the two relationships. There are six chapters. Among them, the first chapter is introductory part, explains the background paper topics, research significance, and then review the relevant research literature. Chapter II analysis the existing theory of investor sentiment Chapter III select several indicators to build a Chinese investor sentiment indicators, and then study the mutual influence relationship between the investor sentiment and stock returns using the measurement method. Chapter IV study the influence between the investor sentiment and stock returns. Chapter V use the VAR model to study the dynamic relationship between the investor sentiment and stock returns. Chapter VI consist of the conclusions of the article,then suggest the policy recommendations, and the prospects for future research.Conclusions of this article are summarized as follows:Whether the closed-end fund discount can be a indicator for the investor sentiment, this article found that the the closed-end fund discount’ impact is relatively small, and it is not suitable as a proxy for investor sentiment.Whether investor sentiment can be used as a predictor of stock returns, the paper also gave an answer. Investor sentiment and investor sentiment preliminary value have a positive impact on the stock returns, and the current value of investor sentiment affect more greater, and this impact effect have different characteristics in the different stages of the market. Specifically, when the market is rising, the effect of investor sentiment on stock returns is more significant, and when the market is going down, the effect of investors sentiment on stock returns is relatively small. For the government and institution, this paper proposes the following recommendations:First, they should strengthen education and protection for the small investor. Second, the relevant institution should set up a investor sentiment department to overlook the market fluctuations in investor sentiment, and the department should release an authoritative index of investor sentiment to prevent accidental because of some unforeseen event on China’s financial markets from bring about greater the impact. Third, it should strengthen the supervision of the listed companies in order to make a healthy and orderly securities market. Fourth, the government should reduce the direct intervention to the stock market.