The Relationship between Investors' Sentiment and Stock Market Returns: Evidence from Margin Trading and the CSI 300 Index

Abstract

In recent years, both academia and business have been more interested in investors' sentiment. Margin trading's deployment is beneficial to development of China's stock trading system. Margin trading, to some extent, reflect changes in investors' sentiment. To lessen the impact of noisy investors on stock market volatility, it is crucial to investigate the relationship between these sentiment changes and stock market returns. In this paper, the link between investors' sentiment and CSI 300 index returns is examined. To quantify investors' sentiment, the marginal trading variables eliminating macroeconomic factors are selected as proxy variables to research the correlation between investors' sentiment and CSI 300 index returns. The results show that investors' sentiment does not have a significant effect on returns. Stock market returns have a positive effect on investors' sentiment in the short run, but later this positive effect disappears quickly again. From the perspective of margin trading mechanism, this paper study the relationship between investors' sentiment and stock returns. The empirical results will provide a reference for small and medium investors to make rational decisions, and will also provide a scientific reference for improving the sentiment supervision mechanism of the stock market.