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Investor Sentiment and Stock Return: Evidence from Chinese Stock Market

Feng Junwen and Li Xinxin

This paper selects the trading volume data from January 2010 to December 2014 to study investor sentiment and regard the market daily earnings ratio of Shanghai Stock Exchange A-shares index as stock return. Using ARMA model to research its own characteristics of investor sentiment, then use VAR model and Granger causality test, impulse response function and variance decomposition to research the relationship between investor sentiment and the market returns, thereafter empirical results show that two series have Granger causal relationship exist between each other. Then the heteroscedastic EGARCH model tests the impact of the returns on investor sentiment, and the “bad news” in the market can cause greater volatility than “good news”; Finally, the EGARCH-M heteroscedastic model shows that the impact of investor sentiment to returns exist “risk premium” phenomenon.