Industry Sentiment And Its Effect On Stock Returns

Our country's stock market is too young and also exists many deficiencies.In the real stock market,some of the characteristics of stock price cannot be logically explained by traditional financial theory.However,the behavioral finance theory holds a new perspective to explain these visions.Behavioral theory suggested that the investor sentiment is prevalent in the process of investors' trading activities,and finally had influence on asset prices.So the measurement of investor sentiment and its effect on stock returns was been noticed in the field of behavioral finance.Most of the current researches of investor sentiment concern on market,few of them describe industry sentiment.This paper will discuss industry sentiment and its effect on stock returns.Furthermore,this paper also build investment strategy to verify the industry sentiment.The study on this issue will have an important theoretical and practical significance.Based on weekly data from 2008 to 2015,this paper will discuss the measurement of different industries' investor sentiment from the perspective of behavioral finance,and build different industries' sentiment index by selecting price earnings ratio,price-to-book ratio,trading volume and volatility,and use principal component analysis method to construct different industry sentiments on 28 Shen Wan first level industry.Then,this paper applies OLS regression analysis method,ADF models to study the relationship between the different industry sentiments and their effect on stock returns.Moreover,this paper builds Momentum Trading Strategy,Contrarian Investment Strategy,and proves the practical significance of those industry sentiments.Our results showed that: 1,based on the weekly data,the weights of different evaluation indexes are considered,which result in some differences in different industries' investor sentiment.2,the change of investor sentiment has different impact on different industry index returns.The more impact appears in automobile industry,and the least in the chemical industry.3,finally,this paper uses the different impact of industry sentiment for different industry earnings choosing automobile industry and chemical industry to build investment strategy,it can be able to capture significant excess returns.