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

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  • Sana Tauseef
  • Hira Suman

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.

Suggested Citation

  • Sana Tauseef & Hira Suman, 2023. "Sentiment and stock returns: aggregate and cross-sectional analysis from Pakistan," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 13(4), pages 502-527.
    • Handle: RePEc:ids:afasfa:v:13:y:2023:i:4:p:502-527
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