Investor Sentiment and Stock Market Returns: Evidence from the Indian Market

Investor sentiment refers to investors' confidence in the market based on their subjective beliefs. Investor sentiment has become a topic of substantial interest among academicians as investor sentiment induces uninformed demand shocks, which can potentially drive away stock prices from their fundamental value. This study expands the literature on the effect of investor sentiment on stock market returns by constructing an Investor sentiment index for the Indian market. We use Nifty-Fifty returns and the sample period ranges from April 2012 to March 2022. The Principal Component Technique is employed to construct an investor sentiment index using seven market and firm implicit proxies: advances to decline ratio, buy-sell imbalance ratio, equity issues to total issues, volatility premium, share turnover, price-earnings ratio, and turnover volatility ratio. The regression analysis shows that the investor sentiment index has the predictive power to forecast Nifty-Fifty returns.