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The modern financial theory was generated in 1950s by Markowits and had a rapid development in 1970s. During this period, it gradually forms a relative complete system. Fama propo,sed the concept of efficient market at the beginning and then put it forward to EMH. However, empirical study finds many financial anomalies that modem financial theory cannot explain. These anomalies make academic world rethink about the rationality of EMH and trying to introduce psychology concept to explain financial anomalies. Their efforts create behavior finance.
Behavior finance release the hypothesis of the rational investor and market efficiency. It claims that the investor sentiment can affect the investment decisions and the stock price. This paper focuses on the perspective that the effects of investor sentiment on Chinese stock market and get the main conclusions.
The purpose of this paper is to test effects of investor sentiment on Chinese
stock market. First the paper chooses proper proxy variables to construct a composite index of investor sentiment through principal component analysis and then use this index to test its effects on Chinese stock market.
This paper kicks out the macro economic factors before the construction of the
composite investor sentiment index. The index is used as the proxy variable to test its effect on the stock market using correlation, regression, Granger test and VAR model.