Empirical Study On Investor Sentiment And Stock Returns

Since2005, China’s stock market experienced a huge shock, during the two moreyears the Shanghai Composite Index rose600%from June,2005to October,2007, themarket was in the state of irrational exuberance. After the financial crisis in2008, investorsin the market was in the through fear and the Shanghai Composite Index marketcapitalization has shrunk by up to70%in just one year. In this big shock impact, peoplehas a more profound understanding of Behavioral Finance, investor psychology is one ofthe most important theoretical cornerstones of the behavioral finance, the effect to stockreturns cannot be neglected, investor sentiment is an important factor to reflect investorpsychology.This article reference the research methods from Baker&Wurlger (2006), select themarket turnover, the consumer confidence index and other five sentiment proxy variables,using principal component analysis to construct a comprehensive market sentiment index,based on the Fama-French three factor model introduced sentiment changes index, and didthe empirical study with the excess rate of return of the market returns as well as the stockprice, the price/earnings ratio, the price to book ratio, the corporate size and the companyperformance these5firm characteristic variable. The results show that: sentiment indexrefers to the Shanghai Composite Index and Shenzhen into correlation coefficients hasquite difference; sentiment index and the market returns are mutually reinforcing,sentiment changes index has a significant independent role of factors to stock returns inaddition to the market risk; sentiment change index has better explain to the excess rate ofreturn of price/earnings ratio and the loss of stock, when the investor sentiment rising, thehigh price/earning ratio stocks and the loss of stocks can obtain a relatively high returns.