Investor Sentiment And Stock Return

Early in the90s of last century, the Shanghai Stock Exchange and Shenzhen Stock Exchange were established, which become the beginning of China’s securities market. In the20years, China’s securities market has developed quickly.In2013, the Shanghai Stock Exchange has taken the forth place in the global stock markets, while the Shenzhen Stock Exchange was also among the top20.However, through the history of the development of China’s securities market, we have to admit it that compared with Europe and other mature markets abroad, there are many problems in the operation of the market mechanism, laws and regulations, market supervision and other aspects in the China’s securities market. First, policies play an important role in China’s securities market. Many mechanisms are established under the leadership of the government, because China’s securities market is not based on the development of relatively well formed capital markets. The large fluctuations of the stock market in China’s securities market must have something to do with policy’s instability. Second, investors are irrational in China’s stock market. China’s securities market has undergone several twists and turns of the stock market, which highlighted China’s stock market and investors’ irrational. Due to the problem of non-efficient market, the Chinese stock market investors are more concerned about the policy and insider gossip, ignoring the fundamental information of the company’s value. So to some extent, the Chinese stock market investors are also more sensitive to market information. Overreact or herding phenomenon always occurs. Third, China’s securities market’s mechanisms and regulatory measures are not perfect. Ahough in terms of products, mechanisms and legal system, the market has achieved a lot, but there is still much shortcoming. On the one hand, Short mechanism is not perfect, so the market cannot effectively reflect the short message; on the other hand,the lack of supervision often make speculators to take advantage of loopholes in the system causing large-scale market volatility.Mechanism of China’s securities market, laws and regulations, regulatory mechanisms, investor structure are unsound and unreasonable, which have contributions to China’s securities market’s irrational.In China’s securities market, in addition to the classical finance theory factors,investor sentiment,expectations of policy may have an effect on the securities market. In this paper, investor’s sentiment is defined as the deviation between investor expectations of future stock price and its actual value. This article’s aim is to study the influence of investor sentiment on stock returns through behavioral finance theory in China’ Stock Market.Investor sentiment’s building is one of big problems in this article. This article use comprehensive investor sentiment index, by selecting the Consumer Confidence Index CCI, New Number Of Accounts NNOA, Monthly Market Advance-Decline Line MAADL and Turnover Rate TURNOVER, using principal component analysis to calculate Investor sentiment indicator CSI.The purpose of this study was to investigate the effects of investor sentiment on China’s stock market returns, including the impact on the overall yield of the market and the impact on stock returns of different style of the company and its impact on different industry’s yields. After doing ADF stationary test, we analyses the relationship of China’s securities market and investor sentiment. According to the model of single-factor analysis of investor sentiment and market returns and modified three-factor model, we draw the following conclusions:1) there is a positive correlation between investor sentiment and market trends, as investors sentiment improved, the market trend higher; with investor sentiment declined, the market is weakening.2) investor sentiment and market overall yield have positive correlation, when investor sentiment improved, the overall yield market improved; And when investor sentiment declined, the overall yield of the market decline.3) Based on modified three-factor model, adding a comprehensive index of investor sentiment, the explanatory power of the model has increased, it is clear that investor sentiment is one of the factors affecting stock returns in China’s securities market.The purpose of this study also includes the impact of investor sentiment on the different style of the company stock returns and on the different industries yields. In this part, we were using a single-factor model and the modified three-factor model to analyze investor sentiment’s effect on those aspects. We have the conclusions:1) in the single factor model analysis, the impact of investor sentiment on stock returns in different market characteristics is significant.2) In the single factor model analysis, except the media, banks, non-banking finance industries, the impact of investor sentiment on different industries are significant, and the coefficient is positive, which indicating that there is a positive correlation between sentiment and industry yields.3) The modified three-factor model regression effect is not significant. In summary, we have come to the conclusion that our stock market is an irrational market. In our market, investor sentiment constitutes to the value of securities. So it is important to take the investor sentiment into consideration when investing in the market. And our government should make contribution to avoid risk from investor sentiment.