Abstract
This paper investigates the effect of investor investment sentiment on individual stock returns in China. We find that investment sentiment is positively associated with stock performance contemporaneously. The Granger Causality test shows that investor sentiment is a driving force of stock price movement but not the other way around. Our constructed VAR model further suggests that the change in investor sentiment in the lagged period does not significantly affect the current stock return. In addition, both the Impulse Response and the Variance Decomposition analysis provide evidence that the stock price will increase right after a positive sentiment shock, and then follow a price drop until an intrinsic value comes up. Overall, the investor sentiment factor has a strong explanatory power to explain the variation in stock return.
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