Impact of Investor Sentiment on Stock Market Returns: Evidence from India

Abstract

Aims: Behavioral finance assumes that investors choose investments as on their varied opinions and sentiments about the market. This study tries to determine the impact of investor sentiment on stock market returns by constructing an Investor sentiment index for the Indian market. Methodology: The present study employs BSE Sensex- financial year returns of ten years, and the sample period ranges from 1 April 2014 to 31 March 2024. The Principal Component Technique is applied to form an investor sentiment index using seven separate market proxies. Results: The regression analysis's beta value of 1.305 predicts that the investor sentiment index positively impacts BSE Sensex returns. The value of R-squared is 0.0137, which indicates that investor sentiment has little influence on Sensex BSE returns. Investors and other stakeholders can understand the role of investor sentiments in the stock market and make decisions accordingly. The study will also assist future scholars in exploring a similar domain of research. Conclusion: Investor sentiments are crucial for the stock market. The present study tries to develop new insights into the current literature, specifically in the Indian context, by analysing the relationship between investor sentiment and BSE Sensex returns.