Impact of investor sentiment on portfolio return: An ARDL approach

Keywords: ARDL, Investor Sentiment, Portfolio Return, Principal Component Analysis


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.


Download data is not yet available.


Aggarwal, D. (2017). Exploring Relation Between Indian Market Sentiments and Stock Market Returns. Asian Journal of Empirical Research, 7(7), 147-159. doi:10.18488/journal.1007/2017.7.7/1007.7.147.159

Ahmed, S., & Ullah, N. (2013). Investor Sentiment and Stock Market Dynamics: A Case of Pakistan. Journal of Public Administration, Finance and Law(4), 126-135.

Baker, M., & Wurgler, J. (2004a, June). A Catering Theory of Dividends. (S. Nagel, Ed.) The Journal of Finance, LIX(3), 1125-1166. doi:10.1111/j.1540-6261.2004.00658.x

Baker, M., & Wurgler, J. (2004b). Appearing and Disappearing Dividends: The Link to Catering Incentives. (G. W. Schwert, Ed.) Journal of Financial Economics, 73, 271-288. doi:10.1016/j.jfineco.2003.08.001

Baker, M., & Wurgler, J. (2006). Investor Sentiment and the Cross-Section of Stock Returns. Journal of Finance, 61, 1645-1680.

Baker, M., & Wurgler, J. (Spring 2007). Investor Sentiment in the Stock Market. Journal of Economic Perspectives, 21(2), 129-152.

Baker, M., Wurgler, J., & Yuan, Y. (2012, May). Global, local, and contagious investor sentiment. Journal of Financial Economics, 104(2), 272-287. doi: 10.1016/j.jfineco.2011.11.002

Bennet, E. (2011). Sentiments of Indian Equity Investors. Bharathidasan University, Department of Commerce and Financial Studies. Tiruchirappalli:

Bennet, E., & Selvam, M. (2011). Factors Influencing Retail Investors Attitude towards Investing in Equity Stocks: A Study In Tamil Nadu. Journal of Modern Accounting and Auditing, 7(3), 316-321.

Black, F. (1986). Noise. Journal of Finance, 41, 529-543.

Brown, G. W., & Cliff, M. T. (2004, January). Investor Sentiment and the Near-Term Stock Market. Journal of Empirical Finance, 11(1), 1-27.

Concetto, C., & Ravazzolo, F. (2019, May 13). Optimism in Financial Markets: Stock Market Returns and Investor Sentiments. Journal of Risk Financial Management, 12(2), 1-14. doi:10.3390/jrfm12020085

Dash, S. R., & Mahakud, J. (2013a). Investor Sentiment and Stock Return: Do Industries Matter? Margin-The Journal of Applied Economic Research, 7(3), 315–349. doi:10.1177/0973801013491530

Dash, S. R., & Mahakud, J. (2013b). Investor Sentiment, Risk Fand Stock Return: Evidence from Indian Non‐Financial Companies. Journal of Indian Business Research, 4(3), 194-218.

De Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990, August). Noise Trader Risk in Financial Markets. Journal of Political Economy, 98(4), 703-738. doi:10.1086/261703

Giot, P. (Summer 2005). Implied Volatility Indexes And Daily Value At Risk Models. The Journal of Derivatives, 12(4), 56-64. doi: 10.3905/jod.2005.517186

Gupta, L., & Maurya, S. (2021, July-September). Trends and Determinants of Primary Market Activities: Evidences from India. Orissa Journal of Commerce, 43(3), 27-41. doi: 10.54063/ojc.2021.v42i03.03

Kaiser, H. F. (1960, April 1). The Application of Electronic Computers to Factor Analysis. Educational and Psychological Measurement, 20(1), 141-151. doi:10.1177/001316446002000116

Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.

Kumari, J., & Mahakud, J. (2016). Investor Sentiment and Stock Market Volatility: Evidence from India. (R. A. Ajami, Ed.) Journal of Asia-Pacific Business, 17(2), 173-202. doi:10.1080/10599231.2016.1166024

Lee, W. Y., Jiang, C. X., & Indro, D. C. (2002). Stock Market Volatility, Excess Returns, and the Role of Investor Sentiment. Journal of Banking and Finance, 26(12), 2277-2299. doi:10.1016/S0378-4266(01)00202-3

Liu, H.-H., Wu, C.-C., & Su, Y.-K. (2011). The Role of Extreme Investor Sentiment on Stock and Futures Market Returns and Volatilities in Taiwan. British Journal of Politics and International Relations, 11(1), 504-551. Retrieved June 2, 2018, from

McClure, B. (2020, August 20). Using Price-to-Book Ratio to Evaluate Companies. Retrieved November 13, 2020, from Investopedia:

Montone, M., & Zwinkels, R. C. (2015, March). Investor Sentiment and Employment. Duisenberg school of finance - Tinbergen Institute Discussion Paper, 1-43. Retrieved June 29, 2018, from

Naik, P. K., & Padhi, P. (2016). Investor Sentiment, Stock Market Returns and Volatility: Evidence from National Stock Exchange India. International Journal of Management Practice, 9(3), 213-237. doi:0.1504/IJMP.2016.077816

Onatski, A., & Wang, C. (2021, March). Spurious Factor Analysis. Econometrica, 89(2), 591-614. doi:10.3982/ECTA16703

Pandey, P., & Sehgal, S. (2019, June). Investor Sentiment and its Role in Asset Pricing: An Empirical Study for India. (D. Thampy, Ed.) IIMB Management Review, 31(2), 127-144. doi:10.1016/j.iimb.2019.03.009

Pesaran, M., & Shin, Y. (1996). Cointegration and speed of convergence to equilibrium. Journal of Econometrics, 71(1-2), 117-143. doi:10.1016/0304-4076(94)01697-6

Pescatori, A., & Mowry, B. (2008). Do Oil Prices Directly Affect the Stock Market? Cleveland: Federal Reserve Bank of Cleveland. Retrieved from

Qiu, L. X., & Welch, I. (2004, October). Investor Sentiment Measures. SSRN Electronic Journal, 1-52. doi:10.2139/ssrn.589641

Rawlings, J. O., Pantula, S. G., & Dickey, D. A. (1998). Applied Regression Analysis: A Research Tool (2nd ed.). (G. Casella, S. Fienberg, & I. Olkin, Eds.) Raleigh, North Carolina, USA: Wadsorth Inc., Springer-Verlag Newyork. Retrieved March 3, 2021

Rohilla, A., & Tripathi, N. (2022). A Study on Investors’ Sentiment and Market Return of Indian Stock Market. Orissa Journal of Commerce, 43(4), 12-27. doi:10.54063/ojc.2022.v43i04.02

Schmeling, M. (2009, June). Investor Sentiment and Stock Returns: Some International Evidence. Journal of Empirical Finance, 16(3), 394-408. doi:10.1016/j.jempfin.2009.01.002

Sehgal, S., Sood, G. S., & Rajput, N. (2009, April-June). Investor Sentiment in India: A Survey. VISION-The Journal of Business Perspective, 13(2), 13-23. doi:10.1177/097226290901300202

Sehgal, S., Sood, G. S., & Rajput, N. (2010, January-June and July-December). Developing Investor Sentiment for India. Osmania Journal of International Business Studies, 5(1 and 2), 49-55. Retrieved May 30, 2019, from

Simon, D. P., & Wiggins III, R. A. (2001, May). S&P futures returns and contrary sentiment indicators. The Journal of Futures Markets, 21(5), 447-462. doi: 10.1002/fut.4

Smidt, S. (1968). A New Look at the Random Walk Hypothesis. Journal of Financial and Quantitative Analysis, 3(3), 235-261.

Taghizadeh, R., & Ahmadi, M. (2019, January 10). Statistical and Econometrical Analysis of Knowledge-Based Economy Indicators Affecting Economic Growth in Iran: The New Evidence of Principal Component Analysis-Tukey and ARDL Bound Test. Preprint, 1-23. doi:10.13140/RG.2.2.26515.02087

Tripathi, V., & Kumar, A. (2015a, April). Do Macroeconomic Variables Affect Stock Returns in BRICS Markets? An ARDL Approach. Journal of Commerce & Accounting Research, 4(2), 1-15. Retrieved from

Tripathi, V., & Kumar, A. (2015b). Relationship between Macroeconomic Factors and Aggregate Stock Returns in BRICS Stock Markets–A Panel Data Analysis. New Age Business Strategies in Emerging Global Markets, First Impression, 104-123.

Wang, Y.-H., Keswani, A., & Taylor, J. S. (2006, January-March). The Relationships between Sentiment, Returns and Volatility. International Journal of Forecasting, 22(1), 109-123. doi: 10.1016/j.ijforecast.2005.04.019

Whaley, R. E. (2009, April 30). Understanding the VIX. The Journal of Portfolio, 35(3), 98-105. doi:10.1080/09603107.2013.804163

Yang, Y., & Hasuike, T. (2017). Construction of Investor Sentiment Index in the Chinese Stock Market. International Journal of Service and Knowledge Management, 1(2), 49-61.

Yoshinaga, C. E., & Castro Junior, F. H. (2012, April-June). The relationship between market sentiment index and stock rates of return: A panel data analysis. (C. G. Bellini, Ed.) Brazilian Administration Review, 9(2), 189-210. doi:10.1590/S1807-76922012000200005

Zhou, G. (2018, November 1). Measuring Investor Sentiment. Annual Review of Financial Economics, 10, 239-259.

Zweig, M. E. (1973). An Investor Expectations Stock Price Predictive Model Using Closed-End Fund Premiums. The Journal of Finance, 28(1), 67-68

How to Cite
Rohilla, A., & Bhandari, V. (2024). Impact of investor sentiment on portfolio return: An ARDL approach. VEETHIKA-An International Interdisciplinary Research Journal, 10(2), 40-56.