Research On The Interaction Relationship Between Investor Sentiment And Shanghai Stock Index

Finance is the core part of modern economics,and the primary element of a financial market is capital.As the most crucial part of a financial market,the stock market attracts extensive worldwide attention.The stock market in China has experienced eight times growing volatility.Obviously,the behaviors of investor are irrational.What's more,during the development of Chinese stock market,some phenomenon cannot be explained by traditional finance theory.By applying psychology theory in economics,the appearance of behavioral finance provides a new research method to explain some unusual economic phenomenon.Also,behavioral finance fulfills the insufficient part of traditional finance theory.As a branch of behavioral finance,investor sentiment theory can give a reasonable explanation for the behavior of investor group.Due to those reasons,this paper concentrates on the relationship among sentiment of individual investors,sentiment of institutions and the Shanghai composite index.By summarizing the related literature,this paper analyzes the generation and amplification mechanism of how investor sentiment affects the price of stock.Also,this article systematically explains the mechanism of investor sentiment affect stock prices.The emotion of individual investors and the emotion of institutional investors consist the emotion of investor,according to the different characteristics of various investors.By referring BW method and using principal component analysis,this paper tries to build the individual investor sentiment index(PISI)and institutional investor sentiment index(IISI).Based on those indexes,this article creats a vector error correction model(VECM)to analyze the dynamic relationships among sentiment of individual investors,sentiment of institutions and the Shanghai composite index.The empirical results show that there is a cointegration relationship between those three factors.In the long run,there is a positive correlation between the sentiment of the individual investor and the Shanghai composite index,but the sentiment of institutional investor sentiment is negatively related to the Shanghai index.Those relationships show that in our country,institutional investors can affect stock market by limiting individual investor.In the short term,institutional investors can respond quickly by predicting the emotion change of person,but there is a delay for individuals to respond the change actions of the institution.Both individual and institutions can be affected by the Shanghai composite index,but only the individuals have an active relationship to the Shanghai composite index.This also indicates the individual investors are irrational.At the end of the article based on the research results,this paper provides some suggestions for policy.Suggestions include increasing the proportion of institutional investors in the stock market,controlling the affection of network and the media to the stock market and regulating the behavior of institutional investors.