Author(s)

Zhixuan Liu, Caixia Zhou

Corresponding Author

Zhixuan Liu

ABSTRACT

Traditional financial theories assume that investors are completely rational and have homogeneous expectations. In fact, this assumption is difficult to satisfy. In China's stock market dominated by retail investors, the behavior of investors has a significant impact on stock returns. Therefore, this paper studies the impact of heterogeneous beliefs and investor sentiment on stock returns, both of which are important investor characteristics. Firstly, this paper reviews the existing research, analyzes the impact of heterogeneous beliefs and investor sentiment on stock returns, as well as the interaction between them, and puts forward research hypotheses. Then, taking February 2011 to December 2020 as the sample interval, taking China's A-share stock as the sample, it selects the monthly turnover rate as the variable to measure the heterogeneous beliefs, and selects four indicators of closed-end fund discount, turnover rate, number of newly opened accounts and consumer confidence index to construct the investor sentiment index by principal component analysis. It establishes a multiple linear regression model and uses group analysis, cross-sectional regression analysis and other methods for empirical test. The result shows that, in China's stock market, heterogeneous beliefs among investors will have a significant negative impact on stock returns, and this negative impact is particularly prominent in the period of low investor sentiment.

KEYWORDS

heterogeneous beliefs, investor sentiment, stock returns