Research On The Influence Of Investor Sentiment On Stock Return And Its Volatility

The volatility of the stock market has always been a huge concern of the investors.Looking into China's stock market,it has a quantity of problems,such as short development time,defective organizations,information asymmetry,investors'lack of investment knowledge and risk awareness,and so on.Due to these weaknesses,our stock market remains to belong to the category of newly developing capital markets.In the process of more than 20 years of development,China's stock market has experienced a number of severe shocks,during which the stock index rose and fell sharply and the return rate remarkably fluctuated.The emergence of these phenomena has a variety of factors,such as policy,government system,the world's economic situation and so on,but one of them which needs to be focused on is the irrationality of the investors.The structural characteristics of Chinese investors are pretty distinct,which is the high proportion of individual investors.And because of their high enthusiasm but little experience for investing,high profit desire but poor risk awareness,the individual investors are very easy to produce false expectations on the future of the market and tend to estimate the asset price with bias,which leading to irrational judgment and choice.What's more,the herding effect in our stock market is very severe,making the large number of individual investors more likely to be coerced by the irrational forces and follow the trend of investment momentum,which will cause further volatility in the stock market.Behavioral economists lied eyes on the impact of this irrational expectation deviation for the first time and started to call it "Investor sentiment".The emergence of this definition provides a new way for the study on the return rate and volatility of stock market.Under this background,the paper tries to conduct empirical researches on the impact of investor sentiment on stock returns and volatility in china.At first,we selected four variables to construct a new comprehensive investor sentiment index.They are consumer confidence index(CCI),newly opened accounts(NOA),P/E ratio(PE),and stock trading volumes(VOL).Then with the A shares market as the subject of our research,we build a multivariate regression model,which includes the famous Fama-French three factors,to conduct an empirical study on the influence of investor sentiment on stock returns.The results show that investor sentiment can significantly affect stock returns.In addition,because of the two-sides character of the sentiment,we add the indicative function to the original model in order to discuss the different impacts that optimism and pessimism bring to the return rates.It turns out that the results are asymmetry,that optimism has a more significant positive effect on stock returns compared with the pulling-down effect of pessimism.Furthermore,we build a GJR-GARCH model to study the correlation between the investor sentiment changes and return volatility.The results show that the rise of investor sentiment will significantly increase the degree of volatility in the stock market,while the impact in the process of depression is not that obvious.Overall,the investor sentiment is indeed an important factor affecting China's stock market returns and volatility and should be taken seriously.The government and regulatory authorities should seek a scientific and effective way to control investor sentiment on certain degree,meanwhile should avoid abusing frequent policy intervention.With the help of new media platforms,they can guild the investors to think and make choices rationally,thus weakening the irrational forces in the market,and finally achieve the purpose of smoothing volatility and ensuring the healthy and orderly development of the market.Investors should also be aware of the impact of sentiment,cultivate the habit of independent and rational thinking,and avoid losses effectively.