Investor Sentiment And Its Effect On Stock Returns

Modern Financial Theory assumes that investors are rational and the market is efficient.It believes that the price of assets can reflect all the information in the stock market completely.However,there are many anomalies in the financial market,such as“Closed-End Fund Discount”?“Over-trading” and “Herd effect”,and Modern Financial Theory can not make a reasonable explanation for it,which gives a birth to Behavioral Finance Theory.Behavioral Finance Theory believes that both intrinsic value and investor sentiment can determine the price of assets,so investor sentiment is very important to the price of assets.Though our stock market has experienced rapid development,as a emerging capital market,there is still a large gap between the mature security market of developed countries and our stock market.As a result,investors are very irrational in our stock market,such as “pursuit risen up and abandon got down”?“over-trading” and “follow the trend blindly”.Investor sentiment can reflect the psychological state of investors so that it can influence investors' decisions and stocks returns and fluctuations.Therefore,it is very necessary to do research on investor sentiment and stock returns.The article will choose the period from the July of 2006 to the September of 2016 to make the empirical study on investor sentiment and stock returns.Firstly,we select discount of Closed-end Funds(CEFD),turnover rate(TURN),Consumer Confidence Index(CCI),the number of new investor account(NIA)and Baidu Index(BD)as the proxy variables which can reflect the investor sentiment.Then we can use the Principal Component Analysis to obtain the index of investor sentiment(IS)and study the relationship between IS and stock returns by Granger Causality Test and regression analysis.For more information,the article choose four periods,which are the bull market and the bear market before and behind the appearance of short mechanism,to study the differences of the investor sentiment's effect and whether the differences are caused by short mechanism.The result shows that investor sentiment and stock returns can influence each other for a long time.The fluctuations of investorsentiment can positively influence the stock returns,especially for the bull market,and the influence of investor sentiment is not obvious in the bear market.Because of too much restrictions on Securities Margin Trading and Stock Index Futures,there is no obvious difference in the the influence of investor sentiment.In addition,the investor sentiment is introduced in Fama-French Model to investigate its effect on stocks with different equity scale,P/E ratio,P/B ratio,price level and company performance.It finds that the investor sentiment change has a positive effect on returns of stocks with lower price and worse company performance.At last,the article provides some advice for regulators and investors,aiming to do some help to a more healthy market and more rational investment.