Investors' Sentiment and the Stock Market Behavior: An Empirical Analysis of the Saudi Stock Market

Abstract

Lately, investors’ sentiment has become one of the major concentrations of finance literature on asset pricing model. Many research findings argued that changes in investors’ sentiment measure could have an impact on stock returns and volatility and that investors’ sentiment might be an essential variable in the investment decision making. The main purpose of this dissertation is to explore investors’ sentiment as one area of behavioral finance that has not been searched before in the Saudi stock market. This research attempts to come closer at discussing two highly important topics involving investors’ sentiment. Firstly, we will investigate the impact of investors’ sentiment measured by an exclusive index that was constructed for the purpose of this research using principal component approach and a number of sentiment proxies such as the trading volume, and dividend premium on both stock market return and volatility, taking into account some controlling variables the researcher has found them very relevant in this area of investigation, such as liquidity and book-to-market ratios. Secondly, this dissertation will study the relationship of investors’ sentiment and the mispricing of the whole Saudi stock market. This dissertation should have useful practical implication for investors, fund managers, financial advisors and policy makers. It will give the investors a better understanding of many aspects of their sentiment. It will also help fund managers and financial advisor to conduct better price forecasting, and finally it is crucial for policy makers who should work on stabilizing investor sentiment in order to decrease stock market volatility and uncertainty.