INVESTOR SENTIMENTS AND STOCK RETURNS IN EMERGING MARKET: EVIDENCE FROM PAKISTAN STOCK EXCHANGE (PSX)

Abstract

Research is being done to determine whether investor mood has a substantial influence on Pakistan's diverse industry returns. Investor sentiment research mostly focuses on the stock market, with little emphasis given to how investor sentiment affects returns in particular industries. Using Principle Component Analysis, our research work used a repetitive variable to investigate the association between investor sentiment and the equity market returns of a certain sector. Study discovers a correlation between market investor sentiment and selected industrial returns. According to the intended research, investor sentiment can be divided into two categories: optimistic and pessimistic. The findings reveal that optimistic investor sentiment positively affects equity returns in the cement, textile, and auto industries, while pessimistic investor sentiment has no impact on stock returns in the food, fertilizer, power, pharmaceutical, and oil industries. For the time period spanning 2017–2021, we used the most recent statistical method, the Markov Switching Model, to examine the robustness of long-term correlations among the research variables. Additionally, the consequence of the optimistic and pessimistic states on the profits of various Pakistani businesses is also looked at. The findings showed a substantial relationship between industry performance and investor sentiment. Keywords: Investor sentiments, behavioral finance, stock returns, leverage effect, Markov Switching Model.