The Impact of Investor Sentiment on Return of Different Industries in Pakistan

Abstract

We classify stocks in different industries to measure industrial sentiment based on principle component analysis in order to examine whether investor sentiment exerts a differential impact on stock returns across different industries. After having constructed industry-level sentiment indices we construct a composite investor sentiment index. Our results suggest that investor sentiment negatively affects current as well as future stock returns in Pakistan over the examined period. However, we find that the influence of investor sentiment varies substantially across different industries. We also find that the market sentiment index has a negative relationship with both current and future stock returns. We also show that the direction of the relationship between return and sentiment remains same for the current and future period. This indicates that investors overreact to the available information and mispricing exists for a prolonged time. Our results confirm that sentiment driven mispricing persists for upcoming time and stock markets are not fully efficient to adjust instantaneously.