The Empirical Study Of Investor Sentiment Measurement And Its Impact On Market Return In Chinese Stock Market

1980s have witnessed a series of crashes, bubbles and crisis that challenge the classical finance model focused on unemotional investors and effective market. The behavioral finance, combines the important achievements of finance, psychology as well as sociology and revises the two basic premises of standard finance theory, assumed that investors cannot make a completely rational estimate due to the bias in their cognition, sentiments or preferences. Based on the investors sentiment theory, this paper uses the trading data from2006.06to2013.06and select5sentiment proxies, namely Consumer Confidence Index(CCI), Closed-end Fund Discount (CEFD), Numbers of New Accounts(NNA),trading volume(VOL) and turnover (TURN), to construct a composite index of sentiment. The primary goal of this research is to investigate the impact of sentiment on the general or cross-section returns of securities in Chinese Stock Market.In the empirical study, using Fama-French(1993) factors model and CAPM model, we inspect the role of the composite index in the overall market returns and the impacts on securities of different portfolios, industries and sectors.The results indicate that:(1) There are obvious interactions between investor sentiment and the overall market returns, and the near-term returns also have apparent impact on current sentiment.(2) The effects of sentiment on returns of different industries and sectors are various and the reversion effect can be easily found in lag period.(3) By making regression analysis, we find that sentiment do have cross-sectional influence on security portfolios, which certifies that sentiment has stronger effects on stocks that are hard to value and hard to arbitrage.