The Study On The Relationship Between Individual Investors’ Sentiment And The Volatility Of The Chinese Stock Market

Traditional finance is based on the hypothesis of efficient market and completely rational human,which means that all the information are contained in price and people can make rational decisions to realize maximum benefit.The emergence and development of stock market not only greatly promoted the development of society,but also produced a lot of financial anomalies which can’t be explained by traditional finance.So behavioral finance came into being,which thinks that the market is not always effective,and people are bounded rational.As an emerging market,the stock market of our country is developing rapidly,and the market scale is expanding quickly.But there are some strange phenomenon,such as excessive trading,frequent fluctuating.All of these are related to investor sentiment.Because of the high proportion of individual investors,this paper studies the relationship between individual investor sentiment and the volatility of Chinese stock market,by analyzing the formation mechanism of investor sentiment and constructing investor sentiment composite index.Firstly,combining with the existing literatures at home and abroad,this dissertation expounds the definition,characteristics and the common indexes of investor sentiment.Secondly,according to the explanation path of investment behavior deviation in behavioral finance,the paper puts forward the research hypothesis,constructs the structural equation model to study the mechanism of investor sentiment through data normality test,model fit test and model modification.Thirdly,in order to measure the individual investor sentiment comprehensively,this paper selects some corresponding indexes from the direct index,the indirect index and the macro economy index to construct the emotional comprehensive index by using the principal component analysis.Finally,the VAR model is established to research the relationship between individual investor sentiment composite index and stock market return,which is represented by the yield of the Shanghai Composite Index and the Shenzhen Composite Index.In addition,many empirical methods are applied,such as model stability test,Granger causality test,impulse response function and variance decomposition.The results show that individual investors’ investment experience has a significant positive effect on cognitive bias,and cognitive bias has a significant positive effect on behavioral bias,which shows the formation and transmission mechanism of investor sentiment.Furthmore,individual investor sentiment and the stock returns are Granger reasons for each other.The effect of emotional change on stock returns is about 7 months,and the fluctuation of stock returns also affects the individual investor’s mood for 5 to 7 months.What’s more,about 9 percent of emotional change is caused by the stock returns fluctuation,and the contribution rate of investor sentiment change to the oscillation of Shanghai Composite Index and Shenzhen Stock Index are 6 percent and 2.8percent.