Research On The Correlation Structure Between Investor Sentiment And Market Return Dynamics Based On The Time-varying ARMA-EGARCH-Copula Model

As a new stock market,the abnormal fluctuation of stock price and market failure caused by irrational trading behavior of investors are more obvious in China's A share market.Behavioral finance believes that investor sentiment can affect the final asset price,and it is one of the important factors of stock market yield volatility.Therefore,the study of the relationship between investor sentiment and market returns is significant for theory and practice.In this paper,we select five indicators which combined with the actual market to measure investor sentiment.These indicators include turnover rate,change rate of the financing balance,change rate of the margin balance,ADR and fund index yield.And then the principal component analysis(PCA)is used to accurately measure investor sentiment,and a comprehensive emotional index is constructed.Next,we analyze the volatility of investor sentiment index and market return rate.On this basis,we analyze the dynamic relationship between investor sentiment and market return based on the time-varying ARMA-EGARCH-Copula model.The results show that:(1)During the sample period,the Shanghai stock index returns and investor sentiment have obvious volatility clustering and persistence;(2)Investor sentiment is positively correlated with the index yield,but it obviously exist large time variability.Generally,when the market fluctuates normally,the correlation coefficient is negatively correlated with the index yield.But when the market fluctuates abnormally,the relationship between the correlation coefficient and the index returns became positive in the inflation phase,and in the crash phase,the relationship between the correlation coefficient and the index returns is weakening,and the influence of the emotion on the income gradually decreases.Finally,based on the results of theoretical and empirical research,we suggest that investors should always pay attention to market sentiment and avoid irrational behavior cased by emotion change.At the same time,we hope that the regulatory authorities can optimize the structure of market investors,improve market mechanism and strengthen the education of investors in order to reduce abnormal market fluctuations and promote the healthy and stable development of financial market.