Association Between Investor Sentiment And Herding TN Chinese Stock Market

It is considered by The Modern Financial Theory that investors are rational,under the assumption of rational person, the market is valid. The behavior ofindividual investors have no impact on the market, because even the irrationalinvestors exist, they will be driven out of the market by the arbitrageurs. But TheBehavioral Finance Theory relaxes the rational person assumption and reveals thebehavior of investors by psychology and behavior. Under the irrational or boundedrational conditions, the behavior of investors will be affected by investor sentiment,and the behavior of investors have an impact on asset prices and even the entirefinancial market. In this paper, we will study the mutual relationships between theinvestor sentiment and herding of Chinese stock market.Full research findings can be summarized as the following three aspects:(1) The definition of investor sentiment is still very vague now, and the currentscholars proposed indicators of investor sentiment from different facets, we think thatsingle indicator is relatively one-sided to measure investor sentiment, on the basis ofthe existing academic about the study of investor sentiment, we select the relevantindicators as a proxy for investor sentiment, and use principal component analysis tobuild an investor sentiment index, the result shows that the investor sentiment indexplay a good role to reflect the investor sentiment of the Chinese stock market, and acomprehensive index is superior to a single indicator.(2) According to the study of herding, the current scholars have taken a researchfrom theory to empirical in different degrees, we research the herding of Chinesestock market through empirical analysis. The results showed that Chinese stockmarket indicate a significant herding, on this basis, we use “sliding window”;technique to study the herding of Chinese stock market by dynamic analysis, it isrevealed that Chinese securities market shows a widespread herding, and the herdingvaries in different times.(3) The current research of the relevance between investor sentiment andherding is still limited. In view of this, we examines the relationship between the investor sentiment and herding in Chinese stock market. The results show thatinvestor sentiment and herding have long-run equilibrium relationship in Chinesestock market. Higher and lower investor sentiment will lead to a deeper herding instock market. Through the further study,we found that investor sentiment is a factorwhich may lead to herding, and the herding in the stock market will affect the investorsentiment either. they both have a certain interpretation to the other.