Research On The Relationship Between Investor Sentiment And Stock Price In China

According to the Behavioral Finance Theory: financial markets are inefficientthanks to the limited ration of investor. By introducing social behavior and cognitivepsychology into financial research, the assumption of rational man in classical financetheroy is questioned. In fact, a lot of evidence shows that the decision by manyinvestors are influenced by mental and emotional bias. Therefore, we urgently need atheory to explain the formation of this phenomenon. It is necessary to study this issuein depth. This paper selects the closed-end fund discount rate, number of newaccounts and other data etc. as a proxy for emotion. We extract the investor sentimentindicators by principal compoent analysis. In order to reflect the influence of differentkinds of shares in market value. We selected Shanghai Composite Index, SSE50index and SSE SME Composite into research. The conclusion are as follows:Firstly, research on the relationship between investor sentiment and stock indexshows that investor sentiment index and stock index have mutual influence. The stockprice’s impact on investor sentiment have greater effect. Investor sentiment havepositive influence on stock price effects only in the current periodSecondly, the study found that investor sentiment impact on shares of smallmarket value is better than the effect on the comprehensive index. Investor sentimentchanges on comprehensive index is stronger than the effect on the stock price ofbigger market value.Thirdly, this study found that investor sentiment is inertial while stock pricesoften goes on a wave-like manner.Chinese capital market still have a long way to go compared to the westernmature capital market. Limited rationality and lack of short selling make the"herding" is prevalent. The securities regulatory departments should be more"people-oriented" when making the public policies.