Research Of The Effects Of Investor Sentiment On Stock Return And Volatility

Against the background of the huge volatility of Chinese Shanghai stock market and the rise of researches on investor sentiment, we put forward a new hypothesis of "the spillover effect of investor sentiment". The investors’ anticipation, which affects the investor sentiment and trading behavior, is based on the recognition of the policy, market information and capital flow. Once the investor sentiment and the economic fundamentals tend to be consistent, the spillover effect comes into being.Firstly, we select six variables such as A-share newly open accounts, P/E ratio, A-shares turnover rate, A-share monthly transaction amount, the consumer confidence index and the Baidu index to construct a new comprehensive investor sentiment index. Secondly, we conduct an empirical study of the influence of investor sentiment on the stock return. By regression analysis, we conclude that investor sentiment has a significant positive relation to the stock market return. Then we study the impacts of the investor sentiment on returns for stocks with different style using Shenwan stock index to further segment stocks and for both bull and bear market. Furthermore, we introduce the Fama-French three factors model to examine how the investor sentiment and the three factors explain the stock market return, different Shenwan stock index return and the bull and bear market return. Thirdly, we study the correlation between investor sentiment and stock volatility using the GARCH model. Finally, we conduct a robustness test to study the impact of investor sentiment on the return and the volatility of the Shenzhen component index.We find that current and 1-period lagged investor sentiment have significant effect on the market return, and the current sentiment weighs in more. The current investor sentiment aggravates the market fluctuation. Moreover, spillover effect can be discovered in segmented markets. When we look at the bull and the bear respectively, significant spillover effect is only seen on the bull market return.In conclusion, the investor sentiment is a key factor contributed to Chinese stock return and volatility. Therefore, in order to facilitate the steady operation of the stock market, the government should 1) use systematic thinking mode to regulate the stock market,2) avoid frequent and inconsistent policy intervention,3) strengthen information supervision on new media platform,4) educate investors and guide them to the value investing, etc., so as to ease the influence causing by the investor sentiment volatility on the market.