Study On The Interactions Between Investor's Sentiment And Stock Market Returns

In contrast to the traditional finance theory, the behavior finance argues that investors in reality are not perfect rational, and investor sentiment plays an important role in determining stock price and market volatility. While in the study of investor sentiment, how to define and quantify the investor's mood has not been unified in academia, thus lead to the conclusion are difference.Based on the phenomenon that selecting investor sentiment proxy variable subjectively and irregularly in previous research. So, this paper put forward an optimum method to build a composite investor sentiment index (ISI). Firstly selects eight indirect selection criteria and establishes Granger causality and VAR model to research the interaction between the eight indirect selection and HuShen300 index return. Then selects four main influential criteria and constructs an ISI by principal component analysis. From their tendency graph, we can found that ISI has obvious positive correlation with HuShen300 index, and ISI always first see the top or bottom before HuShen300 index does.Subsequently, by applying Granger causality test to study the causal relationship between ISI and HuShen300 index, we found that ISI does Granger cause of HuShen300 index, but HuShen300 index does not Granger cause of ISI. Then making use of VAR model to analyze the sentiment factors, financial factors and real economy factors'relative effects to market return. The impulse analyze and variance decomposition method shows that the three factors can affect the stock market index significantly, the sentiment is the most important factor effecting the market return in the short term, while the real economy and financial factors play more important rule in long term.In the end, this article introduces GARCH model to investigate the sentiment change and its impact on stock market volatility, the result shows there is a significant effect of sentiment on stock market volatility. As the optimistic sentiment in the markets increase, the stock return increases. And the good news and the bad news exist asymmetric shock effect. Furthermore, this paper divided the stock market into four different stages, and the further study shows the changing of ISI has a bigger impact on HuShen300 index in the bear market than in the bull market, and the impact is bigger after stock index future introduced than it before.