Research On Interactive Relationship Between Investor Sentiment And Stock Return In China

According to the running situation of the stock market in the countries all over the world, investor sentiment can definitely have great influence on the stock price and risk, leading to a large amount of "financial anomalies" that the traditionally financial theories fail to explain on the stock market. As an immature emerging market, there are many big differences at background, operation and development etc.on China’s stock market, Compared with foreign mature stock market, and the "financial abnormal phenomenon" are even more prominent and significant. So that closely connected with the "market anomalies" is investor sentiment in China’s stock market which is characterized by make great fortune overnight, herding effect, overconfidence, and others.Investor sentiment is an important factor that revealing the psychological state of investors and must have great impacts on investors’behavior and decision, which hence influences stock market return and volatility. Therefore, comprehensive stady of the interrelationship among Chinese stock market return, volatility and investor sentiment is supposed to provide an efficient method to interpret the "financial anomalies" in the market, which hence has profoundly theoretical and practical significance for enhancing the risk management and control on Chinese stock market, improving the efficiency of governmental supervision, and ensuring the healthy, steady, sustained and sound development of Chinese stock market.Firstly, according to the need, there is a comprehensively review of the literature on investor sentiment index and the affect of investor sentiment on stock return; Then, under the guidance of the principle "combined the subjective and objective together" and "grasp the main and put the rest",combined with the use frequency of all kinds of indexes in previous literature and the availability of research data itself, we finally select CCTV everyday retail investor sentiment index, institutional investor sentiment index, the Shanghai composite index turnover rate and trading volume, and make a principal components analysis of the daily data constructing investors compound sentiment indicator; And then we take the compound mood index and the Shanghai composite index return as research samples, making use of the vector auto-regressive (VAR) model to have a empirical research the relationship between China’s stock market return and investor sentiment; Finally, According to the new data genered by original simple data, we choose generalized autoregression conditional heteroscedasticity model (GARCH model) to study the affect of changes in investor sentiment on the volatility of the market return and the affect of changes in market return on the volatility of investor sentiment.The main results in this paper are as follows:(1)the one-period-lagged compound sentiment index has a significantly positive influence on China stock market return, and compound sentiment index is not Granger reason about China’s stock market return;(2) the one-period-lagged Chinese stock market return has a significantly positive influence on compound sentiment index, and China’s stock market return is the Granger reason about compound sentiment index;(3)the logged compound sentiment has a significantly positive affect on the current period index, and the logged market yields has not a significantly positive affect on the current period data;(4) the one-period-lagged change of investors’compound sentiment index generates a significant impact on the volatility of stock market return in the opposite direction;(5) the one-period-lagged change of the stock market benefits produces a unremarkable positive influence on the volatility of investors’compound sentiment index.This results show that, there is significant relationship between China’s stock market return, volatility and investors sentiment. The abnormal rise and fall on China’s stock market was caused in a certain extent by the instability of investor sentiment. Because investor sentiment in stock market never fails to exist, a correct understanding of investor sentiment is the starting point to make financial market policies and regulations for our national securities supervision department, and we does not want to destroy the investor sentiment, but give it the right guidance at the right time.