Measure Of Investor Sentiment In China And Its Impact On Stock Returns

From the beginning of1999to the end of2011, China’s stock market has experienced several bull-bear market cycle, behind the spike of the stock market, the changes of investor sentiment play a role in fueling. When investor sentiment is optimistic, irrational investors start to enter the market for the sake of speculation,"herding" appears--they chase the soaring stocks and the stock market boom;When investors find negative factors in the market sentiment, their sentiment immediately becomes pessimistic and the market will be flooded with panic, irrational investors eager to withdraw from the market,"sell" are rife, and the flourish stock market is going to crash. All of this can be found that China’s stock markets are not in line with the fundamental assumptions of traditional (standard) finance theory (efficient market, effective arbitrage and rational investor), in this context this article introduce investor sentiment theory to empirically research on China’s stock markets and wish to find out:1. Whether investor sentiment is systemic factors to affect the stock market in China;2. Whether the cross-section of stock returns is affected by investor sentiment;3. Which company characteristics of the stocks are more vulnerable to the emotional impact. Through researching these problems, this article can contribute to the development of the theory of behavioral finance and can also provide theoretical support for investors of China’s stock market to make decision.The text is divided into six parts:the first part is the introduction, this part includes introducing the research background, research content, significance, research ideas and frameworks, and pointed out the possible innovation of this article. The second part is a literature review, this part includes:the literature review of definition of investor sentiment; literature review of the explicit sentiment indicators, implicit sentiment indicators, the sentiment composite index and other mood proxy variables; literature review that sentiment has the overall and cross-sectional effects on stock market. Part VI concludes the paper and points out the inadequacies of this article. Part III, Part IV and Part V are the focus of this article. The third part is the measure of China’s investor sentiment composite index. This part focuses on the whole process of constructing investor sentiment index (ISIr) which excludes the macroeconomic impact. Part IV researches whether investor sentiment has an overall effect on the stock market. Through empirical analysis, the sentiment is proved to be the systemic factor of the returns of stock market. Part V researches whether investor sentiment has a cross-sectional effect on the stock market. Through empirical analysis, the sentiment is proved to have significant different impact on the stock of different company characteristics.Because of my limited research capabilities, lack of time and energy, Although focusing on investor sentiment and its empirical impact on stock returns, this article avoids the difficulty of building theoretical models of investor behavior, that is to say, not proposing a set of innovative theoretical model of investor sentiment, but to draw on previous research and make some small changes in the process of construction of sentiment index and its cross-sectional analysis on stock returns.