The Linkage Between Investor Sentiment And The Volatility Of Stock Returns

Usually scholars only used traditional finance theories to explain some phenomena of financial market,they thought that the investors in the market are rational.But with the passage of time,people found that many financial phenomenon can’t get a reasonable explanation through traditional finance theories,so the behavioral finance theory appeared,more and more literatures proved that investor sentiment is an important factor which affects the stock market returns and volatility.China’s stock market development time is limited,it is not very mature compared with foreign markets,so there are still large fluctuations and other abnormal phenomenon in the stock market in China.This paper mainly analyzes the influence of investor sentiment on the volatility of stock returns.This article introduces the proxy indicator of investor’s emotion in the literature at home and aboard,then the specific effects of the detailed classification indicators from the direct,indirect and comprehensive index can be known.On the basis of predecessors’ research,this paper choose the DCEF,TURN,IPON,IPOR,NIA and CCI as proxy indicators of investor sentiment index.This paper takes the "advance" and "lag" variables into consideration,and eliminates the influence of macroeconomic indicators.Then using principal component analysis to construct the comprehensive index of investor sentiment which in conformity with the practical situation of Chinese stock market.The core model of this paper is DCC-Multivariate GARCH model,the dynamic correlation coefficient between different variables can be obtained by this model.This paper can get more accurate analysis results by using this model.This paper analyzes the influence of the investor sentiment comprehensive index on the yield of the Shanghai composite index,the Shenzhen composite index and the Csi 300 index.The stationarity test of these four time series meets the requirement of stationarity.And the results of the ARCH effect test show that they all have the ARCH effect,so the dcc-multiple GARCH model can be used.Finally,this paper gets the conclusion that the investor sentiment is positively correlated with these three indexes.The higher the investor sentiment,the greater the volatility of stock returns.And the dynamic correlation coefficient is affected by the fluctuation of the previous period,and the volatility is persistent.