Impact of Investor Sentiment on Contemporaneous and Future Equity Returns in Emerging Markets

Abstract

The study is aimed to investigate the impact of investor sentiment on returns of selected emerging equity markets i.e., Brazil, India, China, Russia, Indonesia, and Pakistan using non-linear predictive regression analysis. Principal Component Analysis is used to generate investor sentiment index. Investor sentiment has a significant impact on current market returns and this influence is continued in the short run in most of the sample countries. However, the impact of sentiment is not much pronounced in the longer run. Therefore, decision-makers cannot ignore sentiments in at least the short run. The findings of this study may be helpful for investors to better understand the market trends under the influence of sentiments and portfolio managers and risk professionals can devise their strategies accordingly. JEL: G02, G15, G24, M41