Investor Sentiment and Stock Price: Evidence from India

XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM)

22 Pages Posted: 1 May 2013

See all articles by Saumya Dash

Saumya Dash

IIT Kharagpur

Jitendra Mahakud

Indian Institute of Technology (IIT), Kharagpur

Date Written: December 21, 2012

Abstract

The impact of investor sentiment on stock market price has been a subject of long standing interest to both economists and practitioners. Following the theoretical argument of behavioral asset pricing, recent literature confirms the possible linkage between the aggregate investor sentiment and stock returns. In this paper we examine the causal relationship between investor sentiment index constructed from various market related implicit proxies, and aggregate stock market indices such as BSE sensex and NSE Nifty indices. The Johansen co-integration test is applied to measure the long-term relationship between the sentiment index and market indices and Error Correction Method has been used to check the short-term relationship between the two variables. Granger causality test is used to check the causal relationship between them. Our results suggest that, given the evidence of comovements of sentiment and market index there is significant long-run and short-run relationship between the two indices. Consistent with the existing literature which suggest that the sentiment effect is a short-run phenomena, our findings gives an indication that long term investment strategy can effectively mitigate the sentiment risk. The results for causality test suggest that there exist a unidirectional causal relationship between the sentiment index and market indices.

Keywords: Investor sentiment, sentiment index, market return, long-run co-integration, causality effect

Suggested Citation

Dash, Saumya and Mahakud, Jitendra, Investor Sentiment and Stock Price: Evidence from India (December 21, 2012). XI Capital Markets Conference, 21-22 December 2012, Indian Institute of Capital Markets (UTIICM). Available at SSRN: https://ssrn.com/abstract=2258330 or http://dx.doi.org/10.2139/ssrn.2258330

Saumya Dash (Contact Author)

IIT Kharagpur ( email )

Kharagpur, West Bengal 721302
India

Jitendra Mahakud

Indian Institute of Technology (IIT), Kharagpur ( email )

Kharagpur
IIT Khragpur
Kharagpur, IN West Bengal 721302
India

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