The Impact of Investor Sentiment on Stock Returns

This paper constructs investor sentiment index for individual stocks according to the unique characteristic of the Chinese stock market by employing panel data. Based on that, we apply panel regression to this index to investigate the impact of investor sentiment on stock returns in the stock market in China during the period from 2013 to 2022. Empirical evidence demonstrates that the influence of investors’ sentiment is significantly positive. Further, we find that firms with small market value (small-cap stocks) tend to be more susceptible to investor sentiment than those with large market value (large-cap stocks). The results also show that there is a distinct difference in the impact of low investor sentiment and high level of investor sentiment on stock returns.