Study On Return-risk Relationship Of Portfolio Based On Investor Sentiment In Chinese Stock Market

As a typical immature emerging capital market, China’s stock market differs a lotfrom the foreign mature stock markets. So the “financial anomalies” in Chinese stockmarket appear to be more evident and stronger. As an important factor which can revealinvestors’ psychological activity, the investor sentiment must have great effects oninvestors’ behavior and decision, and then have an impact on the return and volatility ofthe stock market. Therefore, comprehensive investigation of the effect mechanism ofinvestor sentiment on the portfolio structure and the return-risk relationship of portfoliois supposed to give a reasonable way to explain the “financial anomalies” in China’sstock market, which hence be of profound theoretical and practical significance forenhancing the risk management and control on China’s stock market, improving theefficiency of governmental supervision, and ensuring the steady, sustained and sounddevelopment of Chinese stock market. This dissertation researches the effect mechanismof investor sentiment on the portfolio structure and the return-risk relationship ofportfolio by setting up a portfolio model based on the investor sentiment theoretically,Then making use of HaoDan Index released by Stock Market Trend Analysis Weekly toconstruct investor sentiment indicator, taking the daily return rate of Shanghai SecurityExchange (SSE) Composite Index and HaoDan Index during the period from January1of2005to December16of2011as samples, this paper makes use of GARCH-M modelto research effects of investors’ sentiment on the return-risk relationship of Chinesestock market empirically.The main research work and the innovation are as follow:①From the aspects of the institutions of Chinese stock market, the investorstructure and the industry characteristics, this paper analyzes the sources of investorsentiment in Chinese stock market. According to the practical situation of Chinese stockmarket, this paper analyzes the main characteristics of investor sentiment, such asspeculative motivation, herd behavior and over-confidence.②Under the hypothesis condition that investors are risk averters whose riskaversion degree is affected by the sentiment, taking the utility maximization as theinvestors’ decision objection, this paper researches the effect mechanism of investorsentiment on the portfolio structure and the return-risk relationship of portfolio bysetting up a portfolio model based on the investor sentiment theoretically. The research results show that investors will buy the excess risk asset by bank lending when they areover-optimistic, and distribute the proportion of the free-risk assets and risk assetsreasonably when they are relatively rational, and short risk assets when they arepessimistic. In addition, the expected excess return of portfolio is positively related toits risk when investors are over-optimistic or relatively rational, and negatively relatedto its risk when investors are pessimistic.③making use of HaoDan Index released by Stock Market Trend Analysis Weeklyto construct investor sentiment indicator, taking the daily return rate of ShanghaiSecurity Exchange (SSE) Composite Index and HaoDan Index during the period fromJanuary1of2005to December16of2011as samples, this paper makes use ofGARCH-M model to research effects of investors’ sentiment on the return-riskrelationship of Chinese stock market empirically. The research results show that thereturn of Chinese stock market is positively related to its risk when investors areoptimistic, and negatively related to its risk when investors are pessimistic.The results of this paper show that there’s a significant relationship between theportfolio structure, the return-risk relationship of portfolio and investor sentiment. Theboom and crash of Chinese stock market, to certain extent, is due to the instability ofinvestor sentiment. Chinese securities regulatory authorities should pay additionalattention to the psychological factors in stock market and, based on the intensive studieson the psychology and behavior features of investors, take effective measures topromote market stability and prosperity.