Research On The Influence Of Investors' Emotional State On Stock Returns

In 1970,Fama proposed the Efficient Market Hypothesis(EMH),one of the pillar theories of modem financial theory.At the time,it was sought after by many scholars.It described the performance of financial products such as stocks and bonds in an effective financial market.The price that comes out contains all the information,that is,whether it is historical information,new information or insider information,investors have no way to obtain excess investment income through this information,so investors only need to adopt a passive investment strategy to obtain normal.The stock returns can be made without having to make active investments because no one can beat the market.With the passage of time,EMH has been challenged more and more.At the theoretical level,the three level of EMH's theoretical foundations have been overthrown.A large number of scholars have found that humans have a lot of irrational behaviors.And in actual investment activities,investors' investment decisions are not random,so the long and short positions in the market cannot be perfectly offset.As for the risk-free arbitrage behavior of arbitrageurs,the existing of it in the actual investment is debatable.Judging from the actual market performance,especially the financial crises that have occurred in recent decades,it has proved that investors are not rational at all.On the contrary,they are very speculative,especially in the US subprime mortgage crisis in 2007.It is confirmed that not only individual investors are highly speculative,but institutional investors also have strong speculative nature.With the growing doubts about EMH and the continual failure of modem financial theory in the face of various financial visions,a large number of scholars have begun to break out of the research framework of modern financial theory,studying the investment behavior of irrational investors.At the same time,the knowledge of finance,psychology,behavioral science and other disciplines were applied together in the research process,which led to the birth of a new discipline,behavioral finance.With the deepening of research in this direction,scholars have gradually paid attention to the investor sentiment and conducted in-depth research on it,especially in terms of emotional metrics,the impact of emotions on stock market and stock pricing,and the results have been fruitful.It can be determined that the future research on investor sentiment will be more in-depth,and correspondingly will produce more important research results.Since China's first publicly-issued stock issue,China's capital market has gone through more than 30 years.Although it has achieved a certain degree of success in scale,there are still many problems in China's capital market and it is actually still in the initial stage compared with the capital markets of developed countries in Europe and America.For example,China's stock market often has a sharp rise and fall.In the 13 years from 2003 to 2016,China's stock market experienced three sharp rises and falls.From the abnormal operating characteristics of China's stock market,the decisive factor of China's stock market is not just a fundamental factor.The proportion of individual investors in China's capital market is very large.The individual investors are easily influenced by emotions and conduct irrational investment behavior.Therefore,in the market environment dominated by individual investors in China,investor sentiment will definitely have an important impact on stock returns.The influence mechanism and degree of investor sentiment are the urgent problems to solve today.Based on the above reasons,the paper starts from the market as a whole and Shanghai composite index is selected as the research object.Ten technical analysis indicators are selected as the emotional agent variables,and the daily data of these ten indicators for the five years from 2014 to 2018 are extracted from the Wind database.The paper uses the partial least squares method(PLS)to construct the daily investor sentiment comprehensive index and tests its robustness and tests the Granger causality between it and the yield data.It is found that the daily investor sentiment composite index based on the PLS method is not robust.Through Granger causality test,it is found that in the short term,the index and stock returns can Granger cause to each other and the influence of the daily investor sentiment composite index have two periods of delay which disappears in the 7th periods.In this way,the paper solves the problem of measuring investor sentiment and make the theory of constructing a higher frequency investor sentiment index become a reality.Then,in order to study the influence of investor sentiment on stock returns,the paper uses the rolling window(RW)model to calculate the monthly conditional variance of stock returns,that is,the volatility of the yield,as a risk agent for stock returms.Based on the newly calculated monthly investor sentiment comprehensive index,the sample interval is divided into different emotional periods.Than using stock return rate to conduct regression analysis on volatility of return rate and investor sentiment.It is found that the volatility of stock returns during the pessimistic period is extremely dramatic and pessimistic investor sentiment will make the theoretical risk-return relationship invalid and reverse,that is,the higher the risk,the lower the return.But the influence of the optimistic investor's emotional state cannot be judged for the reason of the regression result is not significant.