The Building And Application Of The Chinese Investor Sentiment Index

In recent years, domestic scholars have made a lot of research of investor sentiment, but in thedesign of investor sentiment comprehensive index no one gets a result that can get alldomestic scholars’ unanimously approved. In this paper, based on the investor sentimentindicators that approbatory by academics, I try to use principal component analysis (PCA) toconstruct a comprehensive index of investor sentiment of Chinese stock market.The main part of this paper is consisted of three parts. First of all, based on the Discount ofClosed-End Fund, net increase of accounts of A-shares, exchange rate, Turnover andConsumer Confidence Index these five basic sentiment indicators, I use principal componentanalysis (PCA) to construct a comprehensive index of investor sentiment of Chinese stockmarket that can reflect the various aspects of Chinese stock market. In the constructed index,Consumer Confidence Index has the highest proportion, and net increase of accounts ofA-shares accounts for the smallest proportion.Secondly, by using linear regression analysis I find he change of investor sentiment has asignificant influence on the returns of the Shanghai Composite Index. On this basis, bytaking investor sentiment into the account of CAPM model, I build an emotional CAPMmodel. Through comparing classical CAPM model and emotional CAPM’s empirical resultsin China’s stock market, I find that the emotional CAPM has a better significance andgoodness of fit, this further validates the comprehensive index of investor sentiment I designed is reasonable.Finally, this paper respectively presents the actual application of the investor sentimentcomprehensive index in investment and financing guidance and government regulatory andpolicy-making.The research of this paper are valuable both in theory and actual. The study can help us havea better understanding of our country’s stock market.