MAX Anomaly, Idiosyncratic Volatility Anomaly And Investor Sentimen

Classical financial theory assumes that investors are completely rational people,and information can respond to asset prices completely,timely and quickly.Therefore,the market is effective,and the stock return can hardly be predicted.People can’t beat the market through strategic portfolio,and there is no long-term arbitrage opportunity in the market,so the best investment strategy is to hold a market-oriented portfolio as decentralized as possible to obtain an average rate of return.But in fact,the stock price does not obey the law of random walk as traditional financial theory thinks.The assumptions of classical financial theory are too strict to meet in the real market environment.With a large number of stock market anomalies gradually revealed by people,the classical financial theory can hardly explain these unconventional financial anomalies,so it has been greatly impacted and questioned,and therefore it has further promoted the continuous attention of the theoretical and business circles to the financial anomalies,so it has always been the focus of research.In the various explanations of various financial anomalies in the stock market,the role of irrational traders has been gradually understood and paid enough attention.Noise traders are a concentrated summary of these irrational people.Researchers have found that noise traders,especially those with gambling speculation tendency,do not act rationally in trading.When this typical speculative tendency reaches a certain scale,there will be a great inconsistency between the fundamental value of the stock and the stock price,Behavioral finance puts aside the assumption of rational person in traditional finance,and pays special attention to analyzing the cognitive bias of various irrational investors,especially investor sentiment,so as to make a more scientific and reasonable explanation for the anomalies of the stock market.This paper studies the relationship between the extreme daily return anomaly,namely MAX anomaly and idiosyncratic volatility anomaly,which generally exist in the financial markets of various countries,and investor sentiment,explores the role of different emotional states on the two stock market anomalies,and tries to explain the relationship between the two stock market anomalies from the Perspective of investor sentiment.This paper finds that there are significant MAX effect and idiosyncratic volatility anomalies in China’s A-share market.These two stock market anomalies will be significantly affected by investment sentiment,although the existence of these two stock market anomalies will not be affected by investor sentiment,that is,no matter what state of investor sentiment,MAX anomaly and idiosyncratic volatility anomaly exist significantly.However,the size of the two anomalies will be affected by investor sentiment.With the gradual increase of investor sentiment,both MAX anomaly and idiosyncratic volatility anomaly will increase significantly.Through the joint study of the two stock market anomalies,this paper finds that the MAX anomaly and the idiosyncratic volatility anomaly do not exist independently in China’s A-share market,and the MAX effect can be absorbed and explained by the idiosyncratic volatility anomaly.However,the idiosyncratic volatility anomaly exists independently of the MAX anomaly.This paper analyzes it from the perspective of investor sentiment,It is found that although the MAX anomaly and idiosyncratic volatility anomaly are positively correlated with investor sentiment,that is,these two stock market anomalies will increase with the improvement of investor sentiment,investor sentiment can not explain the relationship between them.