Is The Investor Sentiment In China’s A-Share Market A Pricing Factor?

With the development of the asset pricing model,investor sentiment has attracted much attention as an influencing factor of the asset pricing model.This paper mainly studies the influence of investor sentiment on asset pricing.This paper design the investor sentiment index(ISI),and explores its ability to interpret excess return rate and risk premium.Further,introduce the ISI into the Fama-French three-factor model to improve the ability of pricing.In this paper,the theoretical analysis of investor sentiment on asset pricing is first carried out,including the definition of “investor sentiment”,the theoretical basis of asset pricing model and the related discussion of China’s stock market characteristics.Secondly,the indicators that can reflect the investor’s trading strength and trading direction are deeply explored.The principal component analysis method is used to construct a quantifiable comprehensive indicator of investor sentiment.Finally,introduce the ISI into the Fama-French three-factor model to improve the ability of pricing.The research results show that in the Shanghai A-share market,investor sentiment has a significant positive risk premium to the asset pricing model.From the theoretical analysis results,investors will produce an "irrational" emotional expression of asset pricing,and due to the emergence of noise trading and herding effect,the actual stock price deviates from its intrinsic value,which becomes the pricing of the impacting asset pricing model.From the empirical research results,the investor sentiment indicator(ISI)has a significant positive risk premium for the current income;the greater the ISI risk exposure,the higher the return;through adding the ISI into the Fama-French three-factor model,we found that ISI itself has a significant positive risk premium and is a very important pricing factor for the Chinese stock market.