The Effect Of Investor Sentiment On Stock Prices

The traditional asset pricing theory is based on the efficient market hypothesis,which holds that the stock price can reflect all the market information and that investors are rational.Even if there are irrational factors,the arbitrage behavior of rational investors will eliminate the influence caused by irrational behaviors;that is,irrational factors do not affect the stock price.However,financial assets often deviate from their real value for a long time.The asset pricing model based on the efficient market hypothesis cannot explain this financial anomaly.Based on the finite arbitrage theory and noise trading theory,this paper summarizes four restrictions on arbitrage activities: capital limit,arbitrage time limit,asset substitute limit and arbitrage cost limit.Based on this,it analyzes the influence mechanism of investor sentiment on stock prices and puts forward two hypotheses: First,investor sentiment is an essential factor affecting the prices of the Chinese stock market.Second,the stock prices of enterprises with small scale,weak profitability,high leverage ratio,high volatility and high growth rate are more affected by investor sentiment.Then,all the stocks of Shanghai and Shenzhen A-shares,chi next and Science and Technology Innovation Board from January 1,2005 to March 31,2022 are selected,and the stock pool after excluding financial stocks and the stocks of listed companies that may have shell value pollution is taken as the sample.Five indexes,namely the stock relative Strength index,psychological index,adjusted turnover rate,volume logarithm and sentiment willingness index,are used as the original sentiment index.Five proxy indexes are generated by removing the influence of macroeconomic factors and fundamental corporate factors.Then,the principal component analysis method synthesized the daily index of individual stock sentiment at the enterprise level.The impact of investor sentiment on stock pricing was tested by the Fama-French three-factor model,panel regression test and Fama-Macbeth regression.It was found that investor sentiment had a short-term positive impact on the pricing of the Chinese stock market.Then,non-parametric ranking test,enterprise feature panel regression and long-short combination time series regression are used successively to test the different influences of investor sentiment on the stock prices of enterprises with different characteristics.The empirical results show that the stock prices of enterprises with small market value,weak profitability,low growth ability and high equity to debt ratio are more affected by investor sentiment.But there is no certainty that investor sentiment will have different effects on stock prices with different levels of volatility.