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

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.

Leveraged Trading, Irrational Sentiment and Sustainability in the Stock Market: Evidence from China

“…Second, there is little literature related to the relationship between leverage ratio and the sentiment feedback coefficient, and we find the leverage ratio and sentiment feedback coefficients have an "inverted U-shaped" relationship. Third, although there is a huge literature looking at investor sentiment, including measures of investor sentiment [26][27][28][29], investor sentiment and financial market anomalies [2], investor sentiment and stock returns [30][31][32][33][34], investor sentiment and stock market risk [35,36], and investor sentiment and corporate finance [37], however, the studies failed to give a deep looking in the nature of investor sentiment. We screen the multidimensionality contained in the leverage ratio to accurately capture the relationship between the leverage ratio and investor sentiment, and we find that the leverage ratio after purification has the typical characteristics of irrational sentiment.…”

“…There is a huge amount of literature looking at investor sentiment, including measures of investor sentiment [26][27][28][29], investor sentiment and financial market anomalies [2], investor sentiment and stock returns [30][31][32][33][34], investor sentiment and stock market risk [35,36], and investor sentiment and corporate finance [37]. Chinese scholars have also conducted a lot of research on investor sentiment in the Chinese stock market [38,39].…”

Subjective/ Behavioural Factors Influence the PSI 20 and IBEX 35

“…This sentiment is associated with the irrational part of investor expectations not related with logical fundamentals, and linked with the difference between the fundamental value of an asset and the its value to an investor with irrational expectations. For Khan & Ahmad (2018) investor sentiment stems from the conception that incorporates the way investors develop their preferences and beliefs, keeping in mind the mood, emotions, prejudice and cognitive biases and the way they subsequently predict future asset prices. Lee, Jiang & Indro (2002), Fisher & Statman (2003) highlight the prevalence of a contemporary relationship between investor sentiment and the return on developed markets, especially in the US, leading Lemmon & Portniaguina (2006) to affirm that consumer confidence plays a relevant role in the return on markets, particularly in small ones.…”

“…The macroeconomic variables used in our study similarly to other authors are: the industrial production index (Brown & Cliff, 2004;Baker & Wurgler, 2007;Schmeling, 2009;Fernandes, et al 2013;Corredor, 2015;Aydogan, 2016;Khan, 2018), short-term interest rates (Fama & Schwert, 1977;Schmeling, 2009;Baker, Wurgel &Yuan, 2012;Fernandes, et al 2013;Kumari & Mahakud 2015;Aydogan, 2016) monthly variation in the consumer price index (Zouaoui, 2011;Fernandes, et al 2013;Sayim, Morris & Rahmam 2013, Aydogan, 2016.…”

Time Varying Spillovers between the Online Search Volume and Stock Returns: Case of CESEE Markets

“…Individual company names are utilized in studies, which observe those company returns series, as inPreis et al (2010);Bijl et al (2016);Tan and Tas (2019) andKhan and Ahmad (2018).…”