The Construction Method Of Investor Sentiment Based On Price Earnings Ratio And Its Application In A Share Market

As an important part of China’s economic system,the securities market has a history of nearly 30 years.The market scale and market system are constantly improving.However,compared with mature markets such as Europe and America,there are some serious emotional characteristics in China’s securities market,which is caused by the majority of individual investors in China’s securities market.Therefore,it is of practical significance to study the relationship between investor sentiment and market returns.In fact,existing literature shows that stock market returns are affected by investor sentiment,which is mainly due to the existence of noisy traders,which makes arbitrageurs unable to carry out effective arbitrage,and thus the efficient market theory is invalid.Starting from the theory,this paper reviews all kinds of researches on investor sentiment in the field of behavioral finance,constructs an investor sentiment indicator based on price-to-earnings ratio,and conducts a large number of empirical studies.The construction of investor sentiment index is the basis of studying the relationship between investor sentiment and market return rate.Based on the investor sentiment composite index CICSI of China’s stock market,this paper adds the price-earnings ratio index,selects seven individual sentiment indexes,and constructs an investor sentiment index based on the price-earnings ratio by using principal component analysis.In order to verify whether the construction method based on P/E ratio is feasible,this paper conducts verification in three different markets:A share market,B share market and GEM market.The results show that the investor sentiment index based on P/E ratio has A higher correlation with each individual sentiment index,and has A stronger correlation with the corresponding SSE A share index,SSE B share index and GEM index.Therefore,the construction method of investor sentiment based on P/E ratio is feasible,and further empirical results show that the sentiment indicators constructed by this method are more accurate and more extensive.In the aspect of empirical research,this paper chooses A-share market as the research object and studies the relationship between investor sentiment and market return rate by constructing the corresponding GARCH model.The results show that there is A positive fluctuation between investor sentiment and market return rate in A-share market,and this influence is transmitted in both directions.As investor sentiment rises,so do market yields;And if market yields rise,so will investor sentiment.In order to further understand the impact of investor sentiment on the return rate of different industries in the market,this paper chooses the industry sub-index of China Securities Exchange for research,and builds their GARCH models for the return rate of nine different industries in the market.The results show that the returns of 9 different industries fluctuate positively with investor sentiment,but the volatility coefficients are different.Among them,investor sentiment has the largest impact on the pharmaceutical industry and the least impact on the materials industry.