Investor Sentiment and Market Price of Risk in China's Stock Market

摘要

Based on the time series of market price of risk (MPR) corresponding to the A-Share indices of SSE & SzSE, we make an inquiry into the impact of investor sentiment on the MPR. We adopt the vector autoregression (VAR) methodology, and employ impulse response functions to demonstrate the extend to which investor sentiment influences MPR. This approach is due to the fact that both investor sentiment and MPR are two important state variables in the system of stock market. Although we use the same investor sentiment proxy as previous literatures, we decompose this proxy into two components: the rational and the irrational, and explore the exclusive impact of each component to the MPR. We also consider the mutual influence of investor sentiment in Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SzSE) to their MPRs. We find that the response of MPR to a standard shock from the rational component of investor sentiment is significantly negative in the second period, but insignificant to the irrational component. We also find that MPR is significantly different in periods when investor sentiment is pessimistic and optimistic, respectively. More precisely, during the pessimistic period, MPR is positive, while in the optimistic period, MPR is probably negative.