Analysis Of The Impact Of Investor Sentiment On Stock Return

China’s stock market has developed rapidly since its inception and has become the world’s largest emerging market,but it is still lagging behind compared to developed foreign capital markets.With the development of financial markets,many phenomena that cannot be explained by traditional finance have emerged,and behavioral finance,which combines psychology and finance,has developed,the study of the relationship between investor psychology and the stock market is one of the important elements of behavioral finance.China’s stock market has a very high proportion of individual investors,whose lack of professional knowledge,the existence of the psychology of following the crowd and other defects,and therefore more likely to produce irrational behavior and make the wrong investment decisions,and the investor sentiment that leads to irrational behavior may have an impact on stock returns.This paper reviews academic research findings on investor sentiment from the perspective of investor sentiment and examines the impact of investor sentiment on stock returns in a comprehensive manner for the overall A-share market as well as further market segmentation scenarios.Firstly,the background of this paper and the significance of the research are introduced,the characteristics of China’s stock market are described,and the literature on the definition of the concept of investor sentiment,investor sentiment metrics,investor sentiment research models,and the impact of investor sentiment on stock returns are sorted out.By building a single factor model and selecting the daily index of investor sentiment published by the National Development Institute of Peking University as the sentiment factor to join the extended Fama-French three-factor model for regression analysis,we finally conclude that investor sentiment has a significant positive impact on stock returns.Then further refining the market,empirical analysis is conducted for the impact of investor sentiment on stock returns of different styles as well as stock returns of different sectors.Finally,based on the results of the previous analysis,relevant policy recommendations are proposed at the regulatory level,market level,and individual investor level in order to curb excessive stock price volatility and promote healthy stock market development.The results show that the expanded three-factor model with the introduction of the sentiment factor has a stronger explanatory power for China’s stock market than the Fama-French three-factor model,and investor sentiment can significantly and positively affect China’s stock market returns.When investor sentiment is high,it drives stock prices further up,while when investor sentiment is low,it depresses stock prices further.Investor sentiment affects stock returns differently across styles,with more significant effects on high P/E and high P/N stocks,low-priced stocks,loss-making stocks,and small-cap stocks.For stocks in different sectors,the real estate sector,banks,non-bank financials and construction materials sectors are more sensitive to investor sentiment,while food and beverage and manufacturing are relatively less affected by investor sentiment.