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Investor Sentiment and Stock Returns

Author: YangGuang
Tutor: ZuoYanYang
School: Hunan University
Course: Finance
Keywords: noise trading extended DSSW model investor sentiment stock returns
CLC: F830.91
Type: Master's thesis
Year: 2009
Downloads: 452
Quote: 5
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Abstract


In the real stock market, investors are unable to make rational investment decisions which are supposed in the traditional (standard) financial theory.This article studies the influence of investor sentiment on stocks from the view of the Behavioral Finance. The traditional DSSW model assums that investor sentiments are serial independent and following random walk. In fact, a lot of evidences show that noise traders have learning abilities. They learn the noise trader investor sentiment of previous term through investigation or observation. Basic on what they learned, they form their views for the next term stock market. Therefore, on the hypothesis of the first-order autoregressive and a GARCH variance of the the sentiment of the institutional investors, an extended DSSW model is developed and verified by this article.In the first part of empirical testing, this article takes daily question inquiry from HuaDing as the proxy variable of the investor sentiment. The empirical results, using data from China security market, show that the sentiment of the investors is a main factor that influences the stock prices, and lead to systematic risks.In the second part of empirical testing, basic on the result of the first empirical testing, we classify the stocks according to the“speculativeness”. We find that the“speculative”stocks are more sensitive to the investor sentiment. We also find that investor sentiment should weaken the risk-return tradeoff, the more“speculative”the stocks are, the more weaken the mean-variance relation should be by the investor sentiment.Finally, we provide policy proposal for the sake of analyzing the features of the stock market and the investors. It gives us significant suggestions for constructing the stock market and choosing investment strategy.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market > Securities market
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