Abstract
Abstract According to behavioral finance theory, investor sentiment generally exists in investors’ trading activities and influences financial market. In order to investigate the interaction between investor sentiment and stock market as well as financial industry, this study decomposed investor sentiment, stock price index and SWS index of financial industry into IMF components at different scales by using BEMD algorithm. Moreover, the fluctuation characteristics of time series at different time scales were extracted, and the IMF components were reconstructed into short-term high-frequency components, medium-term important event low-frequency components and long-term trend components. The short-term interaction between investor sentiment and Shanghai Composite Index, Shenzhen Component Index and financial industries represented by SWS index was investigated based on the spillover index. The time difference correlation coefficient was employed to determine the medium-term and long-term correlation among variables. Results demonstrate that investor sentiment has a strong correlation with Shanghai Composite Index, Shenzhen Component Index and different financial industries represented by SWS index at the original scale, and the change of investor sentiment is mainly influenced by external market information. The interaction between most markets at the short-term scale is weaker than that at the original scale. Investor sentiment is more significantly correlated with SWS Bond, SWS Diversified Finance and Shanghai Composite Index at the long-term scale than that at the medium-term scale.
Highlights
Traditional financial theory holds that asset price is determined by the intrinsic value
At the long-term scale, investor sentiment is strongly correlated with SWS Bond, SWS Bank, Shanghai Composite Index and Shenzhen Component Index, compared with the medium term
This study investigated the correlation between investor sentiment and Shanghai Composite Index, Shenzhen Component Index, SWS Diversified Finance, SWS Bank, SWS Bond as well as SWS Insurance according to the spillover index
Summary
Traditional financial theory holds that asset price is determined by the intrinsic value. As financial market has continuously developed and market transaction has become increasingly complex, traditional financial theory cannot explain some financial anomalies in reality, such as Allais paradox, calendar effect, equity premium puzzle, option smile, closed-end mutual fund puzzle and the effect of small-cap stocks. In view of these financial anomalies, financial economists overthrew the basic hypotheses of traditional financial theory and explained the financial anomalies from the perspectives of psychology, behavioral science and sociology, forming behavioral finance from the perspective of investor behavior. Based on the noise trader model, De Long, et al.[1] found that investor sentiment is a systematic risk influencing the equilibrium price of financial assets, which triggers a further discussion on the relationship between investor sentiment and capital market. To explore the role of investor sentiment in the process of Chinese capital market volatility and the role of different industries in Chinese capital market volatility, clarifying these issues is of theoretical value for economic research, and has important practical significance for the governance of China’s capital market
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