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Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead–Lag Relationship with Returns: Evidence from Pakistan

Mehwish Aziz Khan () and Eatzaz Ahmad ()
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Mehwish Aziz Khan: Department of Business Administration, Federal Urdu University of Arts, Science, and Technology, Islamabad 44000, Pakistan
Eatzaz Ahmad: SBP’s Memorial Chair, Department of Economics, Quaid-i-Azam University, Islamabad 45320, Pakistan

Sustainability, 2018, vol. 11, issue 1, 1-20

Abstract: The present study examines bi-directional contemporaneous and lead–lag relationships between investor sentiment and market returns in the emerging market of Pakistan over the period of 2006 to 2016. To measure investor sentiment, the study employs a direct proxy namely Google search volume index (GSVI) and nine other indirect proxies. Besides conventional regression and VAR model, the study applies Geweke’s (1982) tests to investigate the nature of relationships between sentiment and returns. Thus, the study adds to existing literature by providing latest and thorough statistical evidence on the role of investor sentiment in influencing market returns. The study finds sufficient evidence regarding irrational behavior of investors in the thin market of Pakistan. In particular, the results indicate substantive role of sentiment in dragging stock market away from its sustainable path as implied by economic fundamentals.

Keywords: sentiment; returns; GSVI; VAR; Geweke measure (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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