Research On The Effect Between Investor Sentiment And Stock Return And Volatility

In the early stage, the traditional financial theory based on rational investor and efficient market hypothesis had occupied the mainstream position of financial theory. After the 1980s, the financial market began to appear some abnormal phenomena that could not be explained by the traditional financial theory, so the behavioral financial theory arose at the historic moment. Behavioral financial theory holds the view that the investors have cognitive biases, they are not "rational man" but "normal man", the investors will make some "irrational" behavior due to the existence of psychological cognitive bias. Investor sentiment is both an important branch of the behavioral finance theory and a hot issue in the current research. This paper takes the Chinese stock market as the research object, based on the behavioral financial theory and explore the answer that how Chinese investor sentiment affects the stock return and volatility.Based on a large number of domestic and foreign related research literature, this paper has selected the appropriate proxy source index to measure Chinese investor sentiment, not only constructing the investor sentiment index by using principal component analysis but also eliminating the impact of macroeconomic factors. Then, based on the investor sentiment index in our country, this paper begins to explore the answer that how Chinese investor sentiment affects the stock return and volatility. The writer not only explores the relationship between investor sentiment and stock return but also studies the relationship between different sentiments (pessimistic and optimistic) and stock return in Shanghai and Shenzhen A-share market and the Growth Enterprise Market when explore the answer that how Chinese investor sentiment affects the stock return. At the same time, the writer also explores the answer that how investor sentiment affects the industry returns based on different industries. This paper not only constructs the single factor regression model but also multiple regression model which adds Fama and French’s three factors as controlled variables, and comparing the fitting effect between the two models. This paper uses the asymmetric GARCH model to study the asymmetric effect between the positive change or negative change of investor sentiment and stock volatility in Shanghai and Shenzhen A-share market, Growth Enterprise Market and different industry when explore the answer that how Chinese investor sentiment affects the stock volatility.The results show that the investor sentiment is an independent systematic factor that affects the stock return, there is a significant positive correlation between investor sentiment and stock return in Shanghai and Shenzhen A-share market and the Growth Enterprise Market, and the optimistic and pessimistic investor sentiment have asymmetric impact on stock return rate. Both the stock return in Shanghai and Shenzhen A-share market and the stock return in Growth Enterprise Market are more sensitive to the optimistic investor sentiment, the effect of investor sentiment to stock return rate exists significant differences among industries.The fitting effect of multiple regression model is better than the single factor model. The positive change and negative change of investor sentiment exhibit the same asymmetric impact on stock volatility in Shanghai and Shenzhen A-share market and Growth Enterprise Market, and the investor sentiment’s positive change could enhance the stock volatility, but the relationship between negative change in investor sentiment and the stock volatility is not significant. The industry yield volatility is significantly affected by changes in investor sentiment, and there exists significant differences and asymmetric impact in the relationship between the industry yield volatility and the positive change and negative change of investor sentiment.