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 onthe MPR. We adopt the vector autoregression (VAR)methodology, and employ impulse response functions todemonstrate the extend to which investor sentiment influencesMPR. This approach is due to the fact that both investorsentiment and MPR are two important state variables in thesystem of stock market. Although we use the same investorsentiment proxy as previous literatures, we decompose thisproxy into two components: the rational and the irrational,and explore the exclusive impact of each component to theMPR. We also consider the mutual influence of investorsentiment in Shanghai Stock Exchange (SSE) and ShenzhenStock Exchange (SzSE) to their MPRs. We find that theresponse of MPR to a standard shock from the rationalcomponent of investor sentiment is significantly negative in thesecond period, but insignificant to the irrational component.We also find that MPR is significantly different in periodswhen investor sentiment is pessimistic and optimistic,respectively. More precisely, during the pessimistic period,MPR is positive, while in the optimistic period, MPR isprobably negative.