The Influence Of Investor Sentiment On Stock Market Returns

The two basic assumptions of modern financial theory are investor rationality and market efficiency.The main view is that the price of all assets is a rational price,which can fully reflect the information in the market.But in recent years,there are many "anomalies" in the market,such as closed end fund discount puzzle and stock premium puzzle,which challenge the effective market hypothesis and stimulate the emergence of behavioral finance.Behavioral finance holds that asset price is determined by its intrinsic value and psychological factors of investors.Therefore,investor sentiment is an important factor that can affect market prices.The stock market of our country is set up late,and investors have some irrational behavior more or less.Therefore,from the perspective of behavioral finance,this paper studies the impact of investor sentiment on stock returns,and puts forward some suggestions for stock investors and regulators based on the conclusions.Combined with the reality of Chinese stock market,the research of this paper mainly includes two parts: theoretical research and empirical research.In the theoretical aspect,first of all,the second chapter introduces the theory and research status of traditional finance,behavioral finance and investor sentiment.The theory of traditional finance is the background of behavioral finance,and the theory of investor sentiment is an important part of behavioral finance,and it is also the focus of this study.Then,in the third chapter,we focus on the DSSW model of investor sentiment.Combined with the actual situation of our country,we make a comprehensive analysis of the theory and the literature.Finally,the hypothesis of this article is put forward.In the empirical aspect,the fourth chapter uses principal component analysis to construct investor sentiment index which is consistent with China's market situation,and applies this index to the fifth chapter empirical research that the impact of investor sentiment on stock returns.In this paper I examine the role of investor sentiment in asset pricing and volatility models applied to the Chinese Market and in particular the Shanghai Shenzhen 300 Index.While many international and domestic scholars have examined this relationship,for example,Black and Fisher(1986),Baker,Stein and Wurgler(2003),Fisher and Staman(2003),Brown and Cliff(2004)and etc.,there is no consensus on the direction of impact between investor sentiment and asset prices.Some studies find a positive relationship while others find a negative relationship when examining different investor sentiment proxies.I construct an investor sentiment index through principal components similar to the work of Baker and Wurgler(2007)who construct a US investor sentiment index using several proxies for sentiment.Research relying on this approach is less developed in the domestic market.Examining this relationship in the Chinese market is interesting as the domestic market is less developed then foreign markets and potentially more susceptible to shifts in investor sentiment.Furthermore by using a principal components approach I am able to construct a more robust measure of investor sentiment.My empirical work then follows my trying where I test for stationarity and causality and my key results follow.Linear model shows there is a significant positive correlation between investor sentiment and market return.The positive innovation of investor sentiment has a positive impact on market return.GARCH model shows that the volatility of investor sentiment has a positive impact on the volatility of market return.These suggests the government should carefully manage IS to limit excess volatility.