Research On Relationship Between Investor Sentiment And Return Volatility Of Stock Market

As an emerging financial theory, behavioral finance is mainly using existing theories of psychology to explain and analyze financial issues. Compared with foreign mature markets, China's stock market still has some other characteristics such as high risk, unreasonable investor structure and so on. China's stock market does not conform to the basic assumptions of traditional financial theory because of these characteristics. Investor sentiment is an important factor which reflects investor psychology and could influence stock market according to behavioral finance. Therefore, the research on relationship between investor sentiment and return volatility of stock market is very important. There had been some important events which impact on the stock market systematically. Stock market changed systematically after these important events. So it is worthy to study that if investor sentiment influences return volatility differently before and after important events. And the research is random in China, so it is an innovation. This research also has important theoretical and practical significance to future research and regulation. The studies on this area enable investors to properly recognize their psychology and foster rational investment idea. The regulatory authorities would take investor psychology into account when they design market system, thereby promoting the market soundly. The concept of investor sentiment is introduced in this article to study that investor sentiment influences China's stock market return volatility. Different influences before and after important events are also studied.Firstly, background and significance of this study are proposed. Based on literature review of existing research, idea and structure of this paper are put forward. The definition and classification of investor sentiment are introduced then. Investor sentiment can be divided into three kinds, direct investor sentiment, indirect Investor sentiment and deputy investor sentiment. Then generation of investor sentiment and mechanism of influencing market are analyzed. This article describes situation and features of investor sentiment in China. After introducing the situation of China's stock market, this paper use CEFD, number of IPO, first day return of IPO, turnover, number of new investors and CCI to construct investor sentiment index by principal component analysis. Finally, empirical research between investor sentiment and return volatility of stock market is done by GARCH model. Empirical research between investor sentiment and return volatility of stock market before and after split share structure reform is also done.Several conclusions are obtained by empirical analysis.(1) Investor sentiment changes and return of stock market are positively correlated, that is, when investor sentiment goes up, return of stock market will increase. (2) Investor sentiment changes and expected return volatility of stock market are positively correlated. Investor sentiment runs high when expected return volatility of stock market rises. (3)Investor sentiment is one of the factors which affect systemic risk of stock market.(4)After the split share structure reform, investor sentiment changes influence expected return volatility more highly. It demonstrates that split share structure reform can impact the relationship between investor sentiment changes and expected return volatility of stock market.