Investor Sentiment and Stock Returns during the COVID-19 Pandemic: Evidence from Chinese Stock Market

Abstract

After decades of development, China's stock market is now at a critical stage of scale expansion. However, China's stock market is dominated by retail investors. Such an immature market is vulnerable to investor sentiment. Based on the current realistic background, this paper studies the relationship between investor sentiment and stock returns in The Chinese market and forecasts the development trend of the future market. This paper firstly combs the literature on investor sentiment at home and abroad and adopts the classical research method of investor sentiment index & principal component analysis. The investor sentiment index was constructed using weekly data of the Shanghai composite index from 2020 to 2021. Select the turnover rate, China SSE 50ETF turnover ratio, closed-end fund discount, Teng Fall Index (TFL) and financing net buying turnover ratio of these five variables to construct. Finally, the multiple linear regression is used to analyze the relationship between investor sentiment and returns. We find that the yield of Shanghai composite index is positively correlated with investor sentiment, which will affect the return of stock market. The significance of this conclusion lies in that it can help to understand the interaction between investor behavior and market activities after the COVID-19 and help to test whether the use of investor sentiment indicators can provide guidance for investors' decisions.