Investor Sentiment and Stock Market Return in China

Abstract This paper makes an empirical analysis between investor sentiment and stock market return in China regarding the Bull/Bear Index in Stock Market Trend Analysis Weekly as investor sentiment index, and Granger causality is applied to this study for testing. The result shows that the medium term Bull/Bear index levels has significant unidirectional cause stock market return, whereas stock market return has notable unidirectional effect on short term Bull/Bear index levels. The changes of Bull/Bear index (medium term and short term) and stock market return affect each other mutually, which proves that investor sentiment has the ability of forecasting stock market return, investors have psychology of simple outward Derivative Anticipation, the information delivered by changes in stock market return influences investor sentiment remarkably, and it is appropriate to choose one month or one quarter as the proper time span of investor sentiment index. Key words investor sentiment; stock market return; Granger causalit