—We investigate the impact of noise trader sentiment on the formation of expected returns and volatility in the context of the frontier stock market of Bangladesh. Empirical results based on a GARCH-in-mean framework show that shifts in investor sentiment are significantly positively correlated with excess market returns. Evidence of this direct impact of changes in sentiment on expected returns is robust across sample periods and alternative measures of sentiment we use in the analysis. In addition, we find that the magnitude of bullish or bearish sentiment changes also exerts an indirect effect on expected returns through its asymmetric influence on the conditional volatility process. Overall, our results suggest that shifts in investor sentiment in the market represent a systematic risk factor that is priced in equilibrium.
—Investor sentiment, volatility, excess returns.
M. A. Rahman and L. K. Shien are with the Faculty of Business, Economics & Policy Studies, Universiti Brunei Darussalam, Gadong BE1410, Brunei Darussalam (e-mail: firstname.lastname@example.org, kokshien.lim@ ubd.edu.bn). M. S. Sadique is with the School of Business, Curtin University, Sarawak, Malaysia (e-mail: email@example.com).
Cite:M. Arifur Rahman, Lim Kok Shien, and M. Shibley Sadique, "Swings in Sentiment and Stock Returns: Evidence from a Frontier Market," International Journal of Trade, Economics and Finance vol.4, no.6, pp. 347-352, 2013.