Research On Relationship Between Investor Confidence And Stock Price

China’s stock market have been on a rollercoaster ride since the fourth quarter of 2014. A lot of investors haven’t awake from the madness has crashed into the abyss of despair. Under the situation of economic growth decline, investors in the transformation and reform of the consensus is expected to lead to the first half of the capital market carnival. However, capital bubble eventually burst because of the lack of financial support for the real economy. Leverage funds and media opinion become the current round of market’s "catalyst". The "boom" and "collapse" expose the defects in China’s capital market, which also reflects the irrational side of investors.Because of the existence of psychological and cognitive bias, investors are limited rational in behavioral finance. It can only take the limited rational behavior which will cause the market’s non-effective and asset prices deviate from the intrinsic value that leads to the market’s systematic bias. This bias in turn will affect investors’ rational judgment of asset prices, leading to cognitive bias and psychological bias to get self enhancement. Ultimately, the formation of feedback mechanism to make long-term assets deviate from the intrinsic value of assets. Investor sentiment is one of the important factors that affect the short-term volatility in the stock market.This paper discusses the causes, forms and effects of investor sentiment in financial markets and create the Investor Confidence Index (ICI). An empirical study conducted in the data from April 2008 to October 2015 through the ICI and Shanghai Composite Index shows that there is a strong correlation between ICI and the stock index. The reversal time of the ICI has certain advance in the stock index trend. ICI can be used to help identify the market top or bottom. When the market fell sharply or rose sharply, investors will appear irrational behavior--performance for the ICI of the wave crest and amplitude should be greater than the corresponding period of stock index. The empirical results of the VAR (3) model with macro-economic comparison show that the relationship between the change of ICI and stock index fluctuations is related to the interaction between them. The impact of a standard deviation disturbance on the stock index return is significant and the impact force can be sustained for 9 months which reached the peak at the second month. But in the long term, the influence of psychological factor is less important than the real economic factor and the financial factor. It is proved that the short-term investors’ psychological change is one of the important factors that affect the stock price fluctuation. Finally, there is a positive relationship between the change of confidence and stock returns in the GARCH model.