Do Indian stock market sentiments impact contemporaneous returns?

Abstract

Purpose The purpose of this paper is to analyse the impact of Indian investor sentiments on contemporaneous stock returns of Bombay Stock Exchange, National Stock Exchange and various sectoral indices in India by developing a sentiment index. Design/methodology/approach The study uses principal component analysis to develop a sentiment index as a proxy for Indian stock market sentiments over a time frame from April 1996 to January 2017. It uses an exploratory approach to identify relevant proxies in building a sentiment index using indirect market measures and macro variables of Indian and US markets. Findings The study finds that there is a significant positive correlation between the sentiment index and stock index returns. Sectors which are more dependent on institutional fund flows show a significant impact of the change in sentiments on their respective sectoral indices. Research limitations/implications The study has used data at a monthly frequency. Analysing higher frequency data can explain short-term temporal dynamics between sentiments and returns better. Further studies can be done to explore whether sentiments can be used to predict stock returns. Practical implications The results imply that one can develop profitable trading strategies by investing in sectors like metals and capital goods, which are more susceptible to generate positive returns when the sentiment index is high. Originality/value The study supplements the existing literature on the impact of investor sentiments on contemporaneous stock returns in the context of a developing market. It identifies relevant proxies of investor sentiments for the Indian stock market.

An empirical examination of investor sentiment and stock market volatility: evidence from India

“…Verma and Verma (2007) showed that investor sentiment has a positive impact on asset return, but it makes an adverse impact on individual and institutional investors owing to market volatility. Aggarwal and Mohanty (2018) studied the impact of the investor sentiment index on the Indian stock market and found that there is a positive relationship between stock returns and investor sentiments. However, most of these studies focused on the general effect of investors' sentiment on stock returns.…”

Investor Sentiment and Stock Market Returns: Evidence from the Indian Market

“…Researchers over the years have used various direct and indirect proxies to measure sentiment, but there are no universal proxies to measure investor sentiment (Aggarwal and Mohanty, 2018;Chen et al, 2020). Therefore, the first task is to measure the investor sentiment of the Indian investors by constructing an investor sentiment index.…”

“…Investors' irrationality has attracted the attention of academicians and practitioners across the globe. As a result, researchers have increasingly focused on investor sentiment and its relationship with stock returns (Aggarwal & Mohanty, 2018;Al-Nasseri et al, 2021;Baker & Wurgler, 2006;Brown & Cliff, 2004, 2005Canbas & Candir, 2009;Chakraborty & Subramaniam, 2020;Dash & Mahakud, 2012;Rashid et al, 2019;Sayim & Rahman, 2015). However, the studies focusing on the sentimentreturn relationship in the Indian context are limited (Aggarwal and Mohanty, 2018;Chakraborty and Subramaniam, 2020;Mahakud, 2012, 2013;Dash and Maitra, 2018;Pandey and Sehgal, 2019).…”

“…As a result, researchers have increasingly focused on investor sentiment and its relationship with stock returns (Aggarwal & Mohanty, 2018;Al-Nasseri et al, 2021;Baker & Wurgler, 2006;Brown & Cliff, 2004, 2005Canbas & Candir, 2009;Chakraborty & Subramaniam, 2020;Dash & Mahakud, 2012;Rashid et al, 2019;Sayim & Rahman, 2015). However, the studies focusing on the sentimentreturn relationship in the Indian context are limited (Aggarwal and Mohanty, 2018;Chakraborty and Subramaniam, 2020;Mahakud, 2012, 2013;Dash and Maitra, 2018;Pandey and Sehgal, 2019). We extend the literature documenting the effect of investor sentiment on stock returns by constructing the investor sentiment index using seven market and firm-related implicit proxies, namely: advances to decline ratio, buy-sell imbalance ratio, equity issues to total issues, volatility premium, share turnover, price-earnings ratio, and turnover volatility ratio.…”

Impact of COVID‐19 pandemic on risk transmission between googling investor’s sentiment, the Chinese stock and bond markets

“…In fact, according to Bu and Li (2014), the sentiment index is a good predictor of the Chinese stock returns. On the other hand, Aggarwal and Mohanty (2018) investigated the impact of the investor's sentiment index on the Indian stock market and discovered a positive correlation between the stock returns and the investor's sentiment.…”