Research on the Effect of Investor Sentiment on the Stock Volatility in China Market Based on Asymmetric GARCH-VAR Model

Abstract

Based on the information processing deviation in Behavioral Finance Theory, this paper, taking China stock market as the research object, discusses the effect of the overall emotional state of Chinese investors affected by information processing deviation on the stock volatility in the composite market of Shanghai and Shenzhen A-shares (SSAS) and the Science and Technology Innovation Board (STIB). Taking the current situation of China stock market into account, this paper selects the monthly comprehensive index of investor sentiment (CICSI_SDR) from March 2013 to March 2023, as well as the monthly stock returns in the composite market of SSAS and STIB. Then the volatility of stock returns is measured by the asymmetric GARCH model, then further combined with the comprehensive index of investor sentiment (CICSI_SDR), the asymmetric GARCH-VAR model is established. The research results found that there is a positive weak correlation between two variables, that is, the investor sentiment would drive the prosperity of financial market if that in the past upsurged and vice versa. Therefore, to better control market anomalies caused by investor sentiment, this paper suggests that the market should establish an evaluation mechanism for investor sentiment and gradually make the investor structure of China stock market be more reasonable.