Sentiment Index and Stock Return in the Nigerian Capital Market

Investor sentiment is a critical factor that cannot be directly measured, it depicts how investors react to emotions, fear, gains, and losses in the capital market. Investors' sentiment has varying impacts on all market participants, both positively and negatively. This study examines interplay of sentiment index and stock return in Nigerian capital market covering period 30/04/2019 to 02/06/2025, using daily secondary time series data with focus on constructing a tailored sentiment index, identifying sentiment indicators that contribute most to sentiment index and interplay between sentiment index and stock return in Nigerian capital market. The sentiment index is constructed using principal component analysis (PCA) with sentiment indicators: trading volume, exchange rate, and interest rate. The study adopts ex-post facto research design using Principal component analysis (PCA) and ordinary least regression (OLS) estimation techniques to analyze dynamic interactions between investor sentiment index and stock returns in Nigerian capital market. The study findings revealed sentiment index is not statistically significant and cannot influence stock returns, while trading volume and exchange rate contribute most to sentiment index in Nigerian capital market. This implies that investors mirror market trading activities in stock selection for trading which promote sentiment driven trading in the market. Also, findings revealed Volatility index (VIX) is statistically significant and good predictor of stock return. this implies, stock price movement is a reflection of how investors respond to market activities. Hence, regulatory authorities should implement robust policies in the area of exchange rate and volatility management as a critical tool for capital market performance for both retail, institutional, and foreign portfolio investors.