A Study On Investor 's Emotion And Stock Returns

Traditional finance is a discipline focus on the investor behavior. It’s built on the basis of two fundamental hypotheses, the "Efficient Market Hypothesis" and the "Rational Actor Assumption". However, the presence of anomalies show that reality may be different from traditional finance theory. To explain the anomalies that can’t be solute by traditional finance theory, scholars combined psychology, sociology with finance, and promoted behavioral finance.In spite of the rational actor hypothesis that used in traditional finance, behavioral finance considers investors as bounded rational, and there are deviations during the process of cognition and investment decision making process, which lead to incorrect expectation about future asset price. The deviation between investor’s incorrect expectation and intrinsic value of asset brings "Investor Sentiment".On account of the context above, this paper reviews traditional finance theory and then briefly recommends behavioral finance as well as compare both. In addition, this paper introduces the definition of investor sentiment, how it generate and how it affect stock price. After brief introduction about investor sentiment indexes, this paper selects "Bright Or Gloom Index" published by the magazine Stock Market Trend Analysis Weekly as the Investor Sentiment Measuring Index and Shanghai Composite Index, Shanghai 180 Index, SME Index as stock return measuring. We analyse the relationship between investor sentiment and stock return in Chinese securities market by constructing a VAR model and taking Granger causality test as well as impulse response function during the empirical test. The empirical test shows connection between investor sentiment and stock return, they impact each other, and short-term investor sentiment is negatively related with stock return, while mid-term investor sentiment is positively related with stock return.