Investor Sentiment And Stock Return

In the paper,we do empirical research about investor sentiment on our country’s stock market, using the monthly data from January 2006 to January 2015 of China’s stock market. This study belongs to the category of behavioral finance, which considers some subjective factors such as investor psychology and behavior. Even though that China’s stock market bas experienced a rapid development in the past 20 years, the gap between mature capital market of developed countries and China’s stock market is still large.The EMH theory and other traditional financial theories can not make a reasonable explanation for some market anomalles on China’s stock market. Therefore, domestic financial researchers introduce behavioral finance theory. This paper can be said to be a supplement to behavioral financial studies.In this research, we innovatively use some key words’ Baidu Index as the proxy variables of investor sentiment.We find that investor sentiment on China’s stock market has both Aggregate Effects and Cross-section Effects.In terms of Aggregate Effects, investor sentiment has a significant positive impact on the future of the market return. When investor sentiment is high, it will boost overall market return,but when investor sentiment is low, overall market return will go down.Thus,on China’s stock market, investor sentiment is an important factor affecting the stock pricing.In terms of Cross-section Effects, stocks with different characteristics have different sensitivity of investor sentiment,which means that investor sentiment has different impact on stocks with different characteristics.From results of our reesearch, we find that poorer growth, higher level of risk, higher price-earnings ratio of companies, the more price sensitive to changes in investor sentiment. Specifically,when sentiment index grows,those stocks with characteristics of poorer growth, higher level of risk, or higher price-earnings ratio will have better returns.