The Construction of Investor Sentiment Index in China's Stock Market

Drawing on the method of Baker and Wurgler and combining with the national conditions of China, we select six indexes, such as the discount rate (CEFDR), the closed- end fund discount rate (CEFDR), IPO quantity (IPOV), price-earnings ratio (P/E), turnover rate (TRO) and consumer confidence index (CCI), which are the proxy indicators to measure investor sentiment changes, and a principal component analysis method is used to construct an index ISI that can better reflect the mood fluctuations of Chinese investors. In the process of using quantitative methods to study the effectiveness of investor sentiment index, this paper uses cointegration analysis and linear regression to verify it. The results show that ISI has a good ability to explain the volatility of China's stock market. The construction of ISI provides a good tool for the subsequent interpretation of investor sentiment hypothesis on the interpretation of "financial vision" in Chinese capital markets.