An Empirical Study On Stock Returns Of AH Listed Companies Based On Investor Sentiment

Behavioral finance gave up the presumption that investors are rational. It combines the theories in psychology(especially behavioral science) with classical financial theories, holding that irrational factors(like the mentality and behavior of investors) have significant effect on the price and volatility of assets. Theoretical and empirical studies on this topic have sprung up around the world. Cross-section listed companies of AH stock markets increase in number. The differences between the markets have attracted the attention of investors and intrigued researchers to test behavioral finance theories by empirical studies, which is of great importance for behavioral finance in turn.In this paper, methodologies used in the field of behavioral finance are adopted to construct market sentiment indices in both mainland China and HK stock markets, which are quite comparable with each other, and to testify the differences in investor sentiments and their effects on individual stocks between both markets. The empirical study focus on the period from February of 2003 to December of 2013. Results of the study show that the volatility of market sentiment index is slightly more obvious in A-shares than H-shares, indicating that investors in H-share market are more rational. Moreover, market sentiment index has more significant impact on stocks in A-share market, while it is the opposite situation for individual stock sentiment index. As to impact of investor sentiment on future returns, investor sentiment in A-shares have more persistence. All these evidences show that the irrationality in A-share markets is more than in H-share market and there are more herd-effects in A-share markets than in H-share market, which provides the theoretical basis for regulation authorities to implement further reform and improvement to the A-share markets.