An Empirical Study On The Relations Between Investor Sentiment And Sharpe Ratios

After the literature review of researches on investor sentiment from home and abroad, itis found that investor sentiment and the Sharpe ratios influence each other mutually. Thestudy on their relationship can effectively reveal the relationship between investor sentimentand fund market as well as provide evidence for the trend of the Fund Index and investmentstrategy of the fund for an under certain risks.Based on principal component analysis, this study first built the market sentiment,institution and individual investors sentiment, and found that these kinds of sentiment wasclosely related to the trend of SSE Fund Index. Then empirical study was conductedbetween investor sentiment and revised Sharpe ratios by using the generalized impulseanalysis in order to reveal the relationship between investor sentiment and the trend of fundmarket. Rational and irrational components of investor sentiment were considered in thisstudy.Through the generalized impulse analysis between the investor sentiment and revisedSharpe ratios, the following findings can be concluded. First, market sentiment indicators canpredict Fund Index and provide a reference for making decision on the fund investment inthe Chinese stock market. Second, it can reveal the relations between the trend of Fund Indexand investors’ investment decision by studying the irrational sentiment and Sharpe ratios.Third, the impact of irrational sentiment was greater than the rational sentiment on the Sharperatios, thus fund investors should pay more attention to the irrational sentiment and study thecurrent macroeconomic fundamentals. Last, institutional investor sentiment is more easily tocause fluctuations to the Fund Index, individual investors can carry out the operationaccording to the investment strategies of institutional investors, and buy the fund when thesentiment of institutional investors are pessimistic, while sell the fund when optimistic.