Impact of investor sentiment on portfolio return: An ARDL approach
Abstract
This paper pioneers an investigation into the intricate relationship between investor sentiment and BSE Sensex returns from January 2010 to December 2021. Employing 32 market and macroeconomic variables as proxies for investor sentiment, we utilized principal component analysis to distill these variables into 11 principal components with eigenvalues exceeding 1, thus creating investor sentiment sub-indices. Utilizing the Auto-Regressive Distributive Lag method, we aimed to elucidate the impact of sentiment on portfolio returns.
Our findings reveal a significantly positive impact of sentiment on portfolio returns throughout the study period. These results hold valuable implications for various stakeholders in the Indian stock market, including retail investors, policymakers, and decisionmakers. Retail investors can leverage these findings as guidance for their decision-making processes, gaining insight into the relationship between sentiment and portfolio returns. Additionally, policymakers and decisionmakers can utilize these insights to inform market strategies and risk management practices.
By delving into the relationship between sentiment and portfolio returns in the Indian stock market, this study contributes significantly to the existing literature. It sheds light on a previously unexplored aspect of market dynamics, offering valuable insights for further research and practical applications in the realm of investor sentiment and market behavior.
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