The Impact Of Chinese Investor Sentiment On The Stock Value Premium

Traditional financial theory is based on two basic assumptions:"totally efficient market" hypothesis and the "rational man" hypothesis. However, in practice, more and more phenomena show that the explain of traditional financial theory to many phenomena is invalid, in the market there are a lot of anomalies which are inconsistent with the traditional theory. In order to explain these anomalies, by introducing psychology and sociology to finance, scholars created behavioral finance.Behavioral finance experts believe that the market investors are not fully rational, and their irrational behavior will lead to abnormal fluctuations in stock prices, making the price from its fundamental value. The factor that lead to price deviation is called "investor sentiment" by the behavioral finance expert, which is one of systemic risk that leads to changes in the stock price, and is an important factor affecting the price.There are many researches on investor sentiment around the world, most of the researches are the affect of investor sentiment on stock returns. However, there are few people studying that if investor sentiment have the same impact on the different types of stocks. In the stock market, the stocks with high book capitalization ratio, high earnings price ratio, high cash flow and high dividend price ratio of stock prices are called value stocks, and the counter is called growth stocks. In stock market of Western countries there is a "value premium vision", that the return of value stocks generally higher than growth stocks. Studies suggest that there are two theories to explain the stock value premium,which is the standard financial theory and the behavioral finance theory. Standard financial theory is based on the assumption of rational person, behavioral finance theory is based on the assumption of irrational person. they assume that irrational behavior of investors in the stock market caused systematic bias. This article from the perspective of investor sentiment, to study the causes of the stock value premium generated.At first, this paper summarizes the research of investor sentiment and the value premium by scholars, summarizes the concept of investor sentiment and the value premium; summarizes several metrics of investor sentiment, there are direct indicators, indirect indicators and integrated indicators; introduces several theoretical model of investor sentiment, such as DSSW model, BSV model, DHS model and HS models, these models explain the psychological factors of investors that impact the stocks. Then, for a summary of the reasons and performance characteristics of investor sentiment in China’s stock market, analyzes the decision-making behavior of investor sentiment on the stock market, the impact of the investment mechanism, mainly heuristic bias, frame-dependent bias and herding acting, and finally in the form of road map of investor sentiment will be analyzed the impact of stock value premium path.In the empirical study, we used the R language for modeling and analysis. At first we use the principal component analysis to reduce the dimension of the collected data and constructed investor sentiment index in accordance with BW index that Bake & Wrugle proposed. This article select CCI, NNOA, TURN, TURNOVER, DCEF), IPOR as index of investor sentiment index. Then, use MINE and Granger causality test to find the correlation between investor sentiment and value stocks earnings, growth stocks earnings and value premium, found that the effect levels of investor sentiment on the value stocks earnings and growth stocks earnings are different, resulting in stock value premium. Finally, we will establish Elman neural network model based on the correlation we found before. We will leverage the investor sentiment to forecast the value stocks earnings, growth stocks earnings and the value premium.