Research On The Relationship Between Investor Sent And China's Stock Return Based On Principal Component Regression

The hypothesis of rational person and the theory of effective market have been the mainstream of traditional finance for a long time.However,with the emergence of a large number of financial anomalies in the 1980s,scholars undoubtedly began to think about the rationality of the rational person hypothesis in traditional finance,which led to behavioral finance.Behavioral finance is different from traditional finance.Psychology and Behavior are effectively introduced into finance to study the irrational behavior of investors.Behavioral finance theory holds that investor sentiment can influence securities prices by influencing investor behavior.Since the establishment of Shanghai and Shenzhen Stock Exchange in 1990,on the premise of maintaining stable macroeconomic growth,China's stock market has experienced many large-scale abnormal fluctuations,which can not be explained by traditional financial theory,but can better explain the actual operation of China's stock market from the perspective of investor sentiment through behavioral finance theory.Therefore,the study of investor sentiment can make us more deeply understand the internal relationship between investor sentiment and the change of stock returns in China's stock market.It is also of great significance to improve and optimize China's stock market.Firstly,this paper combs the literature about the definition,measurement method of investor sentiment and its impact on stock market at home and abroad.On this basis,seven indicators are selected:monthly price-earnings ratio,turnover volume,financing balance,hand turnover rate,number of new investors,the first day return rate of IPO and shibor Through principal component analysis,a comprehensive index of investor sentiment is constructed,and then through qualitative inspection.Secondly,through the regression analysis of VAR model and Granger causality test,it is found that investor sentiment has a positive impact on the overall return rate of stock market in China,and stock returns are Granger reasons for the change of investor sentiment,that is,they show a causal relationship in the statistical sense and this paper further studies how investor sentiment affects stock returns through impulse response analysis.Finally,this paper further studies the impact of investor sentiment on the return of portfolio composed of stocks and small stocks.The empirical results show that the return of investor sentiment on the portfolio composed of stocks is greater than that of the portfolio composed of small stocks.Finally,based on the above conclusions,aiming at the problems of investor sentiment in the market,this paper puts forward some pertinent suggestions,which can help reduce the impact of investor sentiment fluctuations on China's stock market and promote the healthy development of the stock market.