Empirical analysis of investor sentiment and stock return in China

Abstract

Behavioural finance believes that both investor sentiment and the intrinsic value of securities affect the price of financial assets, therefore investor sentiment is an essential component in determining the price of securities and the market’s operation. Individual investors dominate most Chinese stock markets, with only a few institutional investors. The immaturity of capital leads to a more obvious influence between investor sentiment and the stock market, therefore it is of practical significance to study the relationship between investor sentiment and stock market returns. This thesis explored the relationship between investor sentiment and stock market returns, laying a foundation for South African investors to further understand and invest in the Chinese stock market.

This thesis used the number of IPOs, IPO first day return rate, market turnover rate, price- earnings ratio as objective indicators and consumer confidence index as subjective indicator and uses principal component analysis to construct a single investor sentiment indicator. Through the Granger causality test, it is found that there is no Granger causality between investor sentiment and the monthly return of the Shanghai Composite Index. Investor sentiment has a positive impact on the monthly return of the Shanghai Composite Index most of the time, according to the results of impulse response analysis, while the monthly return of the Shanghai Composite Index has a negative impact on investor sentiment. The variance decomposition analysis shows that the contribution of the monthly return of the Shanghai Composite Index to investor sentiment is 3.80% less than the contribution of investor sentiment to the monthly return of the Shanghai Composite Index, which is 4.60%. Thus, investor sentiment explains the monthly return of Shanghai Composite Index more than the monthly return of Shanghai Composite Index explains investor sentiment