Impact of Investor Sentiment on Portfolio Return - Do Economic and Market Conditions Matter?

In a first of its kind, this paper tries to explore the relationship between investors sentiment and BSE Sensex return over the period January 2010 to December 2021 and under different market and economic conditions. Design/Methodology/Approach: The paper uses 32 market and macroeconomic variables as proxy to the investor sentiment. Principal component analysis has been used and the first 11 principal components with eigenvalue more than 1, have been selected to create investor sentiment sub-indices. Weighted/generalized least squares (GLS) method has been used to achieve the objectives of the study. Findings: We find that the impact of sentiment was significantly positive on portfolio return over the period of study. Furter, the slope of fivesentiment sub-indices increased in the boom period and the slope of two sub-indices increased significantly in the bull period. Research Implications: Findings of the study are helpful for retail investors, policy makers and other decision makers in the Indian stock market. Results are helpful for retail investors as guidelines for decision making and; also, they learn about the association between sentiment and portfolio return under different economic and market conditions. Originality/Value: The study contributes to the existing literature by exploring the relationship of sentiment and portfolio return in the Indian stock marketover different economic and market conditions.