Studies in behavioral finance have been established recently in combination with psychology, especially within the area of behavioral science and finance. Behavioral finance can, with greater accuracy, forecast the financial market performance and explain how it affectively operates and influences human behavior, which is caused by psychological motivation in the perspective of the microcosmic individual. However, research related to investor sentiment plays a key role in the research domain of behavioral finance. Moreover, the investor sentiment index, as a highlight of recent studies, sheds significant light on the investment intention or the expectations of market participants, which is of tremendous importance to the overall operation and stability of the stock market. In China there are numerous drawbacks in the operation mechanism of the stock market, the structure of the investor, the behavior of investors, dealer’s control and so forth, which are most likely attributed to the rapid development period of the Chinese stock market. Thus, it is highly necessary and essential to make application of behavioral financial methodology to analyse and determine present and future Chinese investor behavior, as related to investor sentiment. I These research findings have been utilized as a tool of reference both domestically and internationally. Through these various analyses, depicting the characteristics of Chinese investors, we collected and collated the monthly data of closed-end fund discount (CEFD), turnover rate (TURNOVER), new accounts of A shares (NAA), price earnings ratio (P/E), price to book ratio (P/B), change rate of price earnings (SP/E) and change rate of price to book (SP/B), from January 2007 to December 2014, as the single set of emotional factors, so as to construct an accurate comprehensive sentiment index. In addition, we applied the Global Principal Component Analysis in SPSS 22.0 to construct the comprehensive sentiment index for this comprehensive study. In conclusion, the relationship between the investor sentiment index and the stock market index is explored by employing the methods of OLS (Ordinary Least Squares) and IV- 2SLS (Instrument Variables – Two Stage Least Squares). In case of omission, certain macroeconomic factors, which have distinct influence on the stock market, have also been added into the model. Through implementation of panel unit root test, panel co-integration test and regression analysis, there is a clear indication that the investor sentiment index and stock market index certainly have a co-integration relationship. High investor sentiment has a positive effect on the stock market, which is in accordance with the reality that high investor sentiment can enhance and elevate the stock market, while low sentiment will have a detrimental effect, thus, lowering the market index.