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Nonlinear analysis and empirical test of the investor sentiment index system based on OLS theory and the DSSW model

Author(s): Hua Li, Li-na Zhao, Qiu-bai Sun

Investor sentiment is a very important factor affecting stock returns, but its influential way and degree has become a hotspot of behavioural finance research. To further illustrate the problem and understand the role of investor sentiment in stock returns, on the basis of the behavioural finance theory and the DSSW model, this paper measures investor sentiment by constructing an index system including turnover rate, new accounts, consumer confidence index, price earnings ratio. By using Ordinary Least Squares method, the stock returns and investor sentiment's comprehensive nonlinear model is established and subsequently the empirical test is made. The innovation is that this paper comprehensively selected the sentiment indicators of previous literature, quantified the investor sentiment, and then added to the model, which can be observed macroscopically effect of the investor sentiment fluctuations on stock returns. The test result shows that investor sentiment can significantly affect the stock returns, thereby influence the investment decisions. The research result provides a reference basis for securities investors and regulators’ decision-making, which has very important theoretical and practical value to predict the stock market volatility and ensure China's stock market stable operation

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