Study On The Correlation Between Investors’ Sentiment And A-Share Market Return

With the rapidly development of financial research, the combination of psychology and economic theory has received increasing attention. In 2013, the Nobel Prize in economics has awarded to the founders of modern behavioral finance — Robert J. Shille。Since,behavioral finance has become an important branch of Finance. At the same time, a lot of phenomenon in the stock market can not be explained with the modern financial theory, such as long-term reversal, abnormal period, the company anomalies, the equity premium puzzle, IPO discount mystery, scale, calendar effect. But the behavioral finance theory puts a light on these phenomenon. Research on investor sentiment is a one of top researches. Since this paper hopes to study the relationship of investor sentiment and stock market returns with the help of behavioral finance theory. This paper selects 6 individual sentiment indicators from June 2002 to December 2013 as the proxy of investors’ index, i.e. the IPO number, the first day return of IPO, the closed-end funds at a discount, the new investor accounts, turnover rate and the consumer confidence index. After considering the lag variable and advancing variable, the author build a suitable measure of investor composite sentiment index with the help of principal component analysis, and eliminate the impact of macro-economic cycle. This paper selects the Shanghai Composite Index as the representative of stock market returns. With the analysis of the descriptive statistics, the author found that investors’ sentiment index and stock market volatility is consistency. Uses the ARMA GARCH-type models to examine the relationship between the investors’ sentiment index and stock market returns, the results show that the ARMA GARCH-type models can effectively capture the auto regressions and the heteroscedasticities of investors’ sentiment index and the returns of Shanghai Composite Index. The result from Granger Causality Test demonstrates that the factor of returns of Shanghai Composite Index is a significant affecting element to the change rate of investors’ sentiment. However, the author found that the change rate of investors’ sentiment has no significant Granger causality relationship. When the stock market is bullish and the return is increasing, investors behave is in a more optimistic mood. When the market is bearish and the return is decreasing, investors behave is in a pessimistic mood. As an emerging market, China stock market rises and falls with a lot of financial vision. At this time, it is very important to analyze the relationship of investors’ sentiment and stock market returns. With the research of investors’ sentiment, the securities regulators will gain a correct understanding of the impact on investor sentiment in the stock market, while the investors will understand the sentiment and market correctly with rational investment decision. At the same time, it will help promote the healthy development of China’s stock market.