Investor Sentiments and Stock Risk and Return: Evidence from Asian Stock Markets

Abstract

The aim of the study is to investigate the impact of sentiment of individual investors on the stock volatility and return at Asian countries stock markets. To further examine the effect of individual investor sentiment; stock return and volatility in among Asian countries. The study uses monthly consumer confidence index as a proxy of investor sentiment of nine Asian countries, published by trading economics. First, Asian countries microeconomic components were regressed on consumer confidence to identify the impact of microeconomics risk factors on sentiment of investor. Second, impulse response function (IRFs) is derived from (VAR) estimation. VAR estimation is used to examine the changes in the Asian stock markets affected by individual investor’s sentiment. The (IRFs) responses of Asian stock markets returns to rational and irrational investor sentiment is significantly positive. The results reveals positive rational investor sentiment tends to increase Asian Stock Market returns. The findings of Asian countries strongly support assumptions of behavioral finance theory. It further suggests that Asian investors are both rational and irrational decision markers. However, our findings do not hold for country level analysis as decision varies from country to country. For this research monthly data of Asian countries is used of over the period of January 2008 to December 2017.This study will help policy makers to maintain the stability of individual investor sentiments and to decrease financial market uncertainty and volatility. Individual investors can use certain strategies like contrarian strategy of investment for the hard to value stocks and to find out high risk in stock market.This study fills a theoretical gap to growing literature on behavioral finance and determines the impact of sentiment of investors on stock market return of nine Asian countries.