Investor sentiment and stock index: A test of causality based on vector error correction model

In this paper, we use Granger causality test based on VECM to analyze the relationship between investor sentiment and Shanghai Composite Index. We describe the call warrants´ deviation as a proxy variable for investor sentiment. Empirical analysis shows that there exists the long-term negative influence between investor sentiment and stock index and there is no causal relationship between them in the long and short run. Our findings have important implications as investors can predict the market trend and make decisions on investment.