Can Investor Sentiment Predict Stock Market Returns?

Traditional financial theory believes that investors in the capital market are completely rational,but the large number of "images" emerging in the capital market tells us that the completely rational hypothesis is not realistic,and investor sentiment is likely to have a significant impact on the formation of asset prices.Therefore,with the birth of behavioral finance,investigating investor's judgment and investment decision-making from the perspective of investors' psychological factors has gradually become the focus of financial theory research.At the same time,over the past 20 years,the achievements made in the development of China's securities market have promoted the rapid growth of China's economy.As the most potential market in China,the stock market plays a significant role in the development of the socialist economy.The healthy development of the stock market plays an important role in the stability of the national economy.However,due to the recent establishment of China's stock market,the lack of capital accumulation,and the imperfect market mechanism,there are many deficiencies in the stock market.For example,abnormal fluctuations in stock prices,the characteristics of “policy cities” and “message cities”are obvious,and the proportion structure of investors Unscientific,etc.,are far from the goals of the effective market,and the stock market should not be underestimated by the influence of investor sentiment.Therefore,it is of great significance to study whether the investor sentiment of our country can predict the stock market returns,which is of great significance for explaining various emerging phenomena in the stock market and strengthening risk management and control in the stock market.On the basis of summarizing related literature,this paper analyzes the mechanism of investors' sentiment impact on stock market returns based on related theories of behavioral finance,and reviews in detail the investor sentiment measurement and application,and then the above index and S&P index.,GEM index as a sample,using Baidu search data-Baidu index,microblogging behavior data-micro-index construction of proxy indicators of investor sentiment,the use of vectorautoregressive model focused on the impact of investor sentiment on the stock market.First of all,this book elaborates the definition of investor sentiment and its intrinsic link to the stock market returns,providing a theoretical basis for empirical research.Then,systematically sort out the various proxy indicators of investor sentiment.On this basis,the use of vector autoregressive model empirically tests the differences in the impact of investor sentiment metrics constructed from different data sources on stock market returns and their causes,as well as the differences in investors' sentiment impacts on different stock market returns and their causes.The main conclusions of the study are as follows: The “ Suspension-Lower Limit ”keyword-based investor sentiment index predicts better results.The microblogging daily limit index and the Baidu daily limit index reflect the effectiveness of investor sentiment is better than the microblogging bullish index and Baidu bullish index.Investor sentiment has different effects on stock market returns.The microblogging bull market index cannot predict the returns of the Shanghai Stock Exchange,Shenzhen Stock Exchange and GEM Index.Baidu's bull market index can predict the earnings of the Shanghai Stock Exchange and Shenzhen Stock Exchange Index and cannot predict the gains of the GEM Index.The microblogging daily limit index can predict the returns of the Shanghai index to a certain extent,and cannot predict the returns of the Shenzhen Stock Exchange and the Growth Enterprise Market Index.Baidu's daily limit index can predict the earnings of the Shanghai Stock Exchange and Shenzhen Stock Exchange Index to a certain extent,and cannot predict the gains of the GEM Index.This study has important practical implications.Considering the immediacy of online search data and the feasibility of Internet search behavior in forecasting stock market returns,investors and securities regulators in the stock market should all pay attention to the impact and role of online search on the healthy development of the stock market.For small and medium-sized investors,they should improve their ability to obtain,judge,and analyze various kinds of information,reject blind investment decisions,and improve their ability to make scientific decisions.Institutional investors Institutional investors should develop appropriate psychological habits and gradually accumulate investment experience to eliminatepsychological bias.At the same time,institutional investors can monitor the investment dynamics of small and medium-sized investors,conduct reverse investment in order to obtain excess returns,and can also optimize and improve the portfolio of assets.The financial supervisory authorities should strengthen supervision to prevent the purposeful spread of online search,reduce overreaction and lack of response,and create a stable investment environment for investors.In addition,if the stock market information can be monitored in real time,a corresponding information monitoring system will be established to develop more advanced regulatory techniques,improve market supervision efficiency,optimize market order,and prevent financial risks.The government should increase its efforts to implement the hedging mechanism,carry out trading of stock index futures,expand the proportion of institutional investors,and improve the structure of investors.