Analysis of the Impact of Investor Sentiment on Stock Returns

In recent years, the role of investor sentiment in financial markets has received widespread attention, and an increasing number of studies have shown that investor sentiment can affect stock returns through behavioral biases, market liquidity, and risk premiums. This article systematically reviews the theoretical framework of investor sentiment and explores its impact on market volatility, asset pricing, and trading behavior. In addition, this study analyzed the stabilizing role of institutional investors in market sentiment regulation and proposed future research directions, including measurement optimization of investor sentiment, market liquidity interaction, different types of regulatory effects of institutional investors, cross market transmission effects of sentiment, and the effectiveness of policy regulatory tools. Research has found that investor sentiment may lead to irrational market volatility and generate spillover effects in global markets, while institutional investors can to some extent reduce market imbalances driven by sentiment. Policy makers can use these research findings to optimize market regulatory measures and reduce the irrational impact of market sentiment on stock returns.