Investor Sentiment and Asset Pricing

The controversy between Behavioural Finance and Efficient Market Hypothesis focuses on whether investor sentiment has influence on equilibrium price. We implement empirical tests on sentiment in Chinese stock market, which has already been more than 130 million investors as the third biggest stock market in the world. We use discount of close-end-fund and the first-day return of IPOs to support our conclusion: sentiment is the key risk factor in asset pricing. In chapter 1, we discuss the academic work about the theoretical models and empirical results. In chapter 2, CEFs puzzle is explained by sentiment. Then, we prove that there exist the long-term negative and the short-term positive impact of sentiment on returns. In chapter 3, IPOs puzzle is also explained by sentiment. Then, we find that there are feedback between sentiment and stock market return. Finally, we bring forward and testify that sentiment is an important reason of volatility clustering and fat tail of financial data. In chapter 4, we draw the conclusion. This book is designed to the investors who want to understand Chinese market and those who are interested in Behavioural Finance.