The Effect Of Investor Sentiment On Stock Return

Traditional finance theory does not involved the effects of investor sentiment on stock performance. Because traditional finance think people have completely rational can make perfect investment decisions, and in behavioral finance theory frame, it is one of the very important factors. Efficient market hypothesis based on investor completely rational, it is believed that personal pursuit of utility maximization of investment decision may make the stock price equal to their basic value, so share price volatility is random walk. But behavioral finance thinks, investors is not entirely rational un-logic factors, so as the investor sentiment is necessary to be taken into account.Investor sentiment could be considered as over or under-reaction towards information, which causes biased expectation. In the past studies, direct and indirect sentiment proxies are used to test the explaining and predictive power of sentiment on stock performance. In this paper, We choose"haodan index"as sentiment proxies to test the relationship between investor sentiment and stock returns in China. The conclusions show that the first order lag of the change of mid-term sentiment index exerts a significant negative effect on market return volatility, while the second order lag of the same variable have a significant positive impact on market return volatility; however, the fist order lag of the change of short-term sentiment index could not significantly affect market return volatility, but the second order lag of short-term sentiment index has positive influence on market return volatility.