Sentiment and stock returns: aggregate and cross-sectional analysis from Pakistan

Sana Tauseef and Hira Suman

Afro-Asian Journal of Finance and Accounting, 2023, vol. 13, issue 4, 502-527

Abstract: This study examines the impact of investor sentiment on aggregate stock market returns and on cross-section of stock returns for the emerging market of Pakistan. We constructed an investor sentiment index using principal component analysis based on seven proxies: advances-to-decline ratio, share turnover rate, money flow index, relative strength index, price-to-earnings ratio, dividend premium and interest rate. Results of vector auto-regression suggest that one-month lagged sentiment index is a strong predictor of itself and aggregate stock market return with a positive sign, showing persistence and providing evidence of herd behaviour. Our two-dimensional sorts of stock returns indicate disproportionate effect of sentiment on the stock returns as suggested in literature on developed markets; however, the time series regressions of arbitrage portfolios fail to confirm the significance of these cross-sectional patterns.

Keywords: investor sentiment; stock returns; arbitrage portfolios; emerging market; Pakistan. (search for similar items in EconPapers)
Date: 2023
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