Research Of Investor Sentiment's Asymmetric Influence On Stock Returns And Volatility

In the behavioral finance area, researches on the influence of investor sentiment on stock performance have been hot ever since Black brought up the opinion that investor sentiment can affect the effectiveness of financial market in 1986. Many academics have confirmed the influence of investor sentiment on the financial market and stocks with different cross-section characteristics, however, few scholars has analyzed the different investor sentiments, such as optimistic sentiment and pessimistic sentiment, on stock performances. In fact, investors with different cognitive abilities and risk preferences would have differen t sentiments, resulting in different impact on stock returns and its corresponding volatilities. In the Chinese stock market, the length of the bear market is obviously longer than the bull market, which may be an evidence for different sentiments under di fferent market environments caused different stock performances.In order to evaluate the asymmetrical effect of investor sentiment, the thesis first analyzes the formation and measurement of investor sentiment. The article then studies the behavior characteristics under different sentiments. There are four categories, the level and innovation of optimistic and pessimistic sentiments. For each category, the paper systematically assesses the mechanism of how investor sentiments would affect stock returns and volatilities. Next, the thesis constructs an investor sentiment index with the stock market data, and obtains the innovation of investor sentiments after making adjustment of autocorrelation. Finally, the paper valuates the asymmetrical influence of posit ive and negative sentiments on stock returns and volatilities based on Dummy Variable model and GARCH-model. As stated in the experiment result, investor sentiment does have a significant asymmetric influence on stock returns in the Chinese stock market. S pecifically, pessimistic sentiment would decrease the price more than optimistic sentiment would increase the price. In addition, positive sentiment innovation has greater influence on stock returns than negative sentiment innovation, and positive sentiment innovation increases the volatility of stock return, while negative sentiment innovation reduces the volatility of stock return. Meanwhile, the asymmetric effect is more significant in small-cap stocks.