Research On The Interrelationship Between Investor Sentiment And Stock Returns And Volatility

The traditional financial theories based on rational people and efficient market hypothesis firmly occupy the position of mainstream financial theory.After the 1980s,an abnormal phenomenon that cannot be explained by the traditional financial theory appeared in the financial market,and the behavioral finance theory came into being.Behavioral finance theory believes that investors have behavioral cognitive biases.They are not "rational people" but normal people".Investors will make some "irrational" behaviors due to the existence of psychological bias.Investor sentiment is an important branch of behavioral finance theory and is currently a hot topic of research.This paper takes China's stock market as the research object and takes behavioral finance as the theoretical basis to discuss the relationship between investor sentiment and stock returns and volatility in China.First,on the basis of extensive reading of domestic and foreign relevant research literature,this article selects the original index that is suitable for measuring investor sentiment in China:Closed-end fund discount rate,trading volume,IPO quantity,IPO listed earnings,consumer confidence index 6 A proxy of the original indicator,using the principal component analysis method to build investor sentiment index,and remove macro factors.Then we discuss the relationship between investor sentiment and stock returns and volatility in this comprehensive index agency sentiment.Secondly,this paper deeply studies the interaction between investor sentiment and stock market return on two levels of short-term and long-term impact,and conducts a Granger causality test,using single factor and multi-factors that add the control variable FAMA three factors.The linear regression model and the quantile model are progressively analyzed from shallow to deep and from simple to difficult.The results of the study show that short-term market returns can explain the characteristics of investor sentiment,and investors' sentiments can predict market returns and explain the reversal of returns.Both are Granger causes.In addition,in analyzing the impact of investor sentiment on stock market volatility,the linear regression model and vector autoregressive model were used to compare and analyze the effects of investor sentiment volatility,realized volatility,and extreme volatility.The results show that investor sentiment is positively promoting market volatility,and investor sentiment is the Granger cause of stock market volatility.The volatility of stock market changes to a certain extent caused by changes in investor sentiment,especially in the market.In the context of low volatility and investor sentiment,the relationship between the two is more sensitive.At the same time,the overall impact of the investor sentiment index on market volatility is strong,but market volatility has a limited impact on investor sentiment.In the end,this paper puts forward policy recommendations to the relevant regulatory authorities.The research conclusions of this paper can enrich and improve existing behavioral finance theories,and it is important for the regulatory authorities to improve relevant trading systems and regulations,promote the healthy development of the stock market,and guide investors' practical activities.Reference value.