Investor Sentiment Influence On Stock Returns

Recent years, investor sentiment has been a hot research point of Behavioral Finance. Many classical researchs have proved that investor sentiment is a key element influencing stock returns. Based on the method of Baker&Wurgler used in2006, this paper creates a comprehensive investor sentiment indicator using the principal component analysis and aims to examine the relationships between investor sentiment and market return, returns of stock portfolios and returns of industries of China’s A-share market. We draw the following empirical conclusions:Firstly, investor sentiment and market return mutually effect each other, but the relationships differ in different market periods. In the model of one factor of investor sentiment, market return will be effected by investor sentiment.Secondly, we divide stocks into5×5SIZE-B/M portfolios and add investor sentiment into the original Fama-French three factors model, we find that returns of stock portfolios with small size and high B/M are vulnerable to investor sentiment. Using ShenWan stylish index, we draw the conclusion that stock returns of companies with small size, high PE, low PB, low price are more likely to be influenced by investor sentiment changes.Thirdly, investor sentiment will also effect returns of industries. When investor sentiment rises, it’s better to invest industries with positive sentiment β,when investor sentiment goes down, it’s profitable to invest industries with negative sentiment (3.