Construction Of China Securities Investor Sentiment Index And Its Empirical Studies

After only twenty years’ development, China capital market has grown rapidly from a small market to a significant market in today’s world. It is now facing opportunities for further development, while with a large propotion of investors being small and medium investors, who differ greatly in education, knowledge and skills in investment, and they trade frequently with irrationalty and less confidence. Meanwhile, information asymmetry is a threat to small and medium investors’ interests. The ability to access information is essential for the protection of their interests. Therefore, the construction and publication of investor sentiment index is of great practical meaning.Numerous abnormalities exist in the securities market, such as the Equity Premium Puzzle, the Mystery of the Closed End Fund, the Dividend Puzzle, over-reaction and under-reaction, which haven’t been well-explained by traditional financial theories as the hypothesis of the rational man and the efficient market hypothesis, which have given impetus to the development of behavioral finance. This field of study assumes that investor sentiment has a marked influence on asset pricing and adds social, cognitive, and emotional factors on modeling. How to measure investor sentiment has become an important topic in behavior finance.Numerous theoretical and empirical researches in this field have led to the author’s belief that the study of the impact of investor sentiment on the securities market be of great practicality in that it promotes rapid and healthy development of China’s securities market by providing large amounts of information for the supervision and regulation of the securities authorities as well as for participants to make better decisions.This paper includes the following:(1) Exploring existing literature and deciding new direction for research.(2) Deriving a new rational expectations equilibrium model based on the classic information delivery model by embedding the factor of investor confidence; solving the equilibriums of two cases(with and without the released investor confidence index) and proving that asset pricing is impacted by the investor confidence index.(3) Take factors such as economy, economic policies, international economy and financial markets into account, this paper compiles the Investor Confidence Index of the Chinese securities market with survey data of SIPF with is the longest survey data in investor sentiment in China. This paper shows the applicability of the survey data by comparing investors’structure between sample and population. Then, this paper calculates investor sentiment index based on comprehensive scoring method. The analysis of the index shows that investor sentiment index predicts the market bottom of Shanghai Composite Index in2008, therefore we may recognize the investor sentiment index as a leading indicator.(4) Studying the interaction between the investors’ confidence and Chinese stock market index. Results show that:investor sentiment is significantly affected by Shanghai Composite Index closing price, Advance/Decline line, volatility of Shanghai Composite Index, and the impact is greatest during declide period; among international factors, S&P500index one period ahead is negatively correlated with China securities investors’confidence; US consumer sentiment index does not have significant impact on investor sentiment.(5) Examining the relation between investor sentiment index and Shanghai Composite Index. Results show that:Shanghai Composite Index three periods lagged has significant negative impact on investor sentiment, while one period lagged investor sentiment index has significant positive impact on Shanghai Composite Index. The impact of investor sentiment on Shanghai Composite Index first increases then decreases, with a maximum at the eighth period and disappears after the thirtieth period; the impact of Shanghai Composite Index on investor sentiment is largest at one period lagged, then decreases to the fifteenth period and disappears. Thus, the impact of investor sentiment on Shanghai Composite Index is of longer length than the impact of Shanghai Composite Index on investor sentiment.(6) Under asymmetric EGARCH model, this paper analyzes the relation between investor sentiment, its volatility and Shanghai Composite Index return. Results show that:after control investor sentiment and its volatility, Shanghai Composite Index return shows asymmetric volatility, indicating that besides investor sentiment, there exist other market shocks.The paper follows the order of literature review, theoretical analysis, index construction and analysis, and empirical research. The paper systematically reviews the present work of investor sentiment index. After expanding the classic information transmission model, this paper proves in theory the positive impact on stock market after introducing investor sentiment index. The paper first time combines outside market factors with market factors to construct investor sentiment index and uses the longest online investor sentiment survey data in China. It shows the reliability and feasibility of online survey method which is an evidence against the prejudice that online survey is causal survey. Empirical model shows good prediction of the bottom of stock index in2008. And due to the long period of survey, the sample is large and we can provide analysis for sub periods when market is up, down and stable. The results show that stock market is impacted by investor sentiment at most during the period when market is going downwards which coincides intuition.