Effect Of Investors’ Sentiment Based On The Empirical Research Of Chinese Stock Market

Traditional financial theory states that market investors are rational. However,it is empirically evident that investor psychology and emotional impact are importantand cannot be neglected. Therefore, this study explores the effect of stock marketinvestor sentiment in China.This study comprises six Chapters. Chapter One gives an introduction to thewhole research by stating the research background, scope and significance of the re-search.Chapter Two is a literature review focusing on patterns of investor sentiment tohighlight and gauge the perception on the domestic and abroad development trend.Chapter Three indicates the research methodology adopted in the study basedon domestic stock situation. Six sentiment variables were chosen to construct a com-posite sentiment index based on traditional statistical methods such as LASSO andPrinciple Analysis. The justification for use of statistical tests is also elaborated.Chapter Four analyses the relationship between investor sentiment and marketreturn built on regression analysis. It reveals that there exists negative relationshipbetween investor sentiment and market return in the long term. It also shows thatstock market return is a vital determinant in predicting future investor sentiment.Chapter Five explores the relationship between investor sentiment and stockcharacteristics. It is concluded as follows:1) Stocks with lower float market capitalization and price earnings ratio, higherprice per book value, higher volatility, higher return on assets (ROA) and higher div-idend payout ratio are vulnerable to investor sentiment changes, while characteristicssuch as earnings per share of stock, proportion of institutional ownership, stock age,debt ratio, nature of the first stakeholders have no influence on investor sentiment.2) Industry share gains have significant effect on investor sentiment. Shares incertain industries which includes extractive industries, communication and culture, in-dustry, agriculture, forestry, animal husbandry and fishery, wholesale and retail trade,social services, food and beverage industry, oil industry are likely to be affected bysentiment fluctuations. 3) Different stages would have different emotional effect from the sample anal-ysis of emotional effect in several periods.Chapter6is the conclusion of the study in this paper.