The Effects Of Individual And Institutional Investors’ Sentiments On China Stock Returns

Investor sentiment is an important research area in behavioral finance. With relaxing the assumption of rational investors, behavioral finance can interpret many market anomalies. Behavioral finance finds that investor sentiment will affect investors’ behavior and their investment decisions, thus affect the stock market asset pricing. The main significance of investor sentiment is helping to understand the investors’ behavior, to reveal the interaction between stock returns and trading behavior, to grasp the psychological characteristics of investors for the regulation of stock market.The paper studies the impact of investor sentiment on the stock market returns. We divide the investors into individual and institutional investors, and divide the investor sentiment into rational and irrational sentiments. We then study the effects of the four different investor sentiments(individual investor rational sentiments, individual investor irrational sentiments, institutional investor rational sentiments, institutional investor irrational sentiments) on stock market returns. We use a multivariable regression model to differentiate rational and irrational sentiments. We then establish a VAR model and use granger test, impulse response analysis and variance decomposition analysis to study the dynamic relationship between the various types of investor sentiments and China stock market returns. In the end, we divide the market cycle into bull market and bear market to study the effects of investor sentiment on China stock returns.The conclusions are as followed. Different types of investor sentiments have different impacts on the stock returns. The stock returns are mainly affected by the institutional investor rational sentiments, which indicates that China stock market is moving towards maturity. But at the same time, we can not ignore the impact of individual investor sentiments. By studying the effects under different market cycles, we find that under bull market the institutional investor rational sentiments play a decisive role, and individual investor irrational sentiments also have significant effects on stock returns. While under bear market, the institutional investor irrational sentiments and the individual investor rational sentiments play a more significant role than the institutional investor rational sentiments.