INVESTOR SENTIMENT AND STOCK RETURNS: EVIDENCE IN MALAYSIA

Abstract

The objective of the research is to investigate the role of investor sentiment in Malaysia’s stock returns. The state of investor rationality and efficiency of the stock market is debated in theoretical lenses of the behavioural finance paradigm. The behavioural factor, namely, closed-end fund discount, advance-decline ratio, trading volume/turnover, consumer sentiment index (CSI) and business condition index (BCI) that act as the sentiment proxies. These variables are utilized to analyse the relationship with stock returns by implementing a statistical method including Ordinary Least Square (OLS) regression model. The research findings are suggested consistently with theoretical perspectives on the view of behavioural finance and existing evidence on revealing the relationship between sentiment and stock market return index that is statistically significant. However, the risk proxies’ relationship with the stock market is heterogeneous that is in line with the view of the stock market in a complex state. In summary, this study offers important finance body of knowledge (academic), practice (investor) and policy implications through a new insight of theoretical and empirical evidence on the role of sentiment towards the stock market in Malaysia. Briefly, behavioural factors in particular sentiments can be taken into consideration instead only relying on a fundamental factor for stock investment decision making.