An Empirical Study on Investors Sentiment Index and China's Stock Market Return

This paper analyzes the impact mechanism between investors' sentiment and stock market return. With the proxy available, a principal component analysis was used to establish an investor sentiment index, and GARCH-M models were used to evaluate how affects on stock returns from the movement of sentiment and how affects on different portfolio. Results show that investor sentiment was the systemic factor which affected stock return, and the effects to different portfolio were asymmetric. In addition, the synthesis investor sentiment index could truly reflect the investor sentiment volatility.