The Influence Of Investor Sentiment On Asset Pricing

Since the establishment of the asset pricing theory CAPM in the 1990s,domestic and international famous scholars have been studying in finding suitable pricing models,among which the Fama-French factor model is the most famous.However,due to its assumptions and lack of explanation for abnormal phenomena in the capital market,scholars began to research on the irrational behavior of investors.With the development of behavioral finance,investor sentiment has become more and more popular.Scholars try to analyze the causes and trends of stock market fluctuations via the perspective of investor sentiment.Base on lots of literatures,some literatures study the method of investor sentiment’s index construction,the other literatures study the impact of investor sentiment on stock market volatility,and some scholars integrate investor sentiment into asset pricing model to optimize its explanatory ability.Most studies prove that investors’irrational behavior would influence the stock market,which is valuable to explore the discipline of stock market.The purpose of this article is to examine whether taking the investor sentiment as a factor into the three-factor model or the five-factor model can improve the explanatory ability of stock market return,and its applicability in different industries.This article selects China’s comprehensive A-share market from January 2003 to December 2021 as the research object.The basic mood proxy variables are monthly turnover ratio,Price Earnings Ratio,Price to Sales Ratio,liquidity index,shareholders per share and their one-period Lagged Variables.This article uses these variables for factor analysis,then generate new investors sentiment index.Secondly,this article takes the new index as investor sentiment factor of factor pricing model,and uses the GRS testing the three-factor model,the four-factor model,the five-factor model and the new six-factor model.This article observes their intercept terms to find out which factor model is the best.Finally,this article finds that the four-factor model is the best one and uses it for regression analysis by industries,then tries to study their difference.This article finds that because the investor sentiment index is added into the factor pricing model as new factor,the explanatory ability of model was improved.Investor sentiment affects the stock market volatility,and the effect is obvious when the investor sentiment is neutral or pessimistic.The four-factor model performs the best,so this article uses the four-factor model to do regression analysis on different industries.This article finds that the manufacturing industry;electric-power industry,heat industry and water filed industry;environment and public facilities management industry are not suitable for the four-factor model.The excess return rate of the other ten industries can be effectively explained by the four-factor model.The explanation effect of the wholesale and retail industries is best one.The real estate industry are obviously affected by investor sentiment.while the culture,sports and entertainment industries are less affected by investor sentiment.Conclusively,this article aims to provide new explanatory power for the cross section of stock and perfect the traditional pricing model.