Interaction between Stock Return and Retail Investor Sentiment on the Indonesia Stock Market

Abstract

This study investigated the relationship between retail investor sentiment and stock return in Indonesian markets. The examination was based on the firm size characteristics of the big, middle, and small stock indexes obtained from Morgan Stanley Capital Indonesia (MSCI). The study assessed the monthly statistics of the Indonesia Stock Exchange (IDX) on returns on the MSCI index and stock trading volume between January 2015 and January 2021 to analyze the influence of retail investor sentiment. Retail investor sentiment as an object of research has criteria, namely stock trading volume activity carried out by individual investors registered on the IDX. We find that retail investors' irrational sentiments should have a larger impact on all stock market return indexes than their rational sentiments and retail investors' irrational sentiments had the largest impact on the middle stock return index. We also document that the all-stock returns index is significantly and negatively impacted by investor sentiment. Unlike prior research, which placed all of the blame for the negative stock market sentiment on the irrational actions of investors, the new data lends credence to the thesis that underlying economic fundamentals drive stock market returns. Since both rational and irrational emotions affect stock returns, investors can enhance their portfolio performance by considering both. This research adds to the growing literature on behavioral finance regarding the impact of retail investor sentiment on the performance of all stock indices based on firm size characteristics and adds to the understanding of the impact of retail investor sentiment on stock returns, particularly in Indonesia as a representative of an emerging market. Keywords: retail investor sentiment, Indonesia Stock Exchange, stock returns, error correction model, vector error correction model. DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.60.69