Research On Stock Pricing Considering Investor Sentiment

The study of the stock market’s operation rules and the improvement of the income level of stocks motivate the flourish of the methods of relevant investment analysis. Among them, CAPM, Fama-French three factors model which act as the representatives of the securities portfolio analysis method, have provided convincing results to explain changes in stock returns.Asset Pricing Model focusing on foreign mature capital market is not practical in China’s stock market which was established just 26 years ago. The research of of stock pricing needs have its deepest roots in pointcut.Analyzing the characteristics of China’s stock market, combined with the financial anomalies, it is found that investor sentiment can be used as a the legal system, regulatory environment and investors’ characteristics. By Under the guidance of the behavioral finance theory, with the results of previo us studies, this thesis selects turnover indicators and sentiment indicators as a proxy variable, reflects the investor sentiment from the two dimensions of the strength and direction,extends the influencing factors of asset pricing model.to set up a singl e factor and multi factor stock pricing model both concerning on investor sentiment. On the choice of the database taking the monthly data of Shanghai and Shenzhen A shares from 2006 to 2015 as the research sample, carrying out the stock grouping, and calculatinge the risk factors. Based on CAPM, the turnover rate factor and popularity factor are taken into account, with the individual pricing ability of them checked. Based on Fama French three factor model, two new investors mood factors are added, to compare the five factor model concerning on investor sentiment with the classical asset pricing model in the average explaining level and the accuracy of prediction about the excessive return rates of 25 groups of stocks portfolio. To further examine the explanatory power of investor sentiment factors,and exclude the impact of a particular portfolio of stocks, the monthly excessive return rates of individual stock are used to perform time series regression of CAPM, Fama-Frecnh three-factor model andthe five-factor model concerning on investor sentiment Finally, under the premise of controlling stock size and beta value, to observe how investor sentiment affects stock portfolio returns.According to the study, turnover indicators and popularity indicators both in low levels can get higher returns. The Investment strategy is constructed as follows: to buy in when investors are pessimistic and cautious, to sell out when investors are optimistic and excited, which is similar to the reverse investment law proposed b y the father of global investment, Templeton., This has been proved from quali tative to quantitative. Both of turnover factor and popularity factors have pricing power, comparing to the CAPM and, the Fama French three factor model,the five factor model concerning the investor sentiment increases the explanatory ability of the stock portfolio excessive return rates, with the performance of reducting the average and improving the adjusted R2. Investor sentiment has a stronger power to predict stock returns rates of the stock portfolio which has a smaller marke and a higher β.