Modeling Sentiment, Temporal Volatility and Excess Returns: Empirical Evidence From Segmented Stock Market

Excess Returns: Empirical Evidence From Segmented Stock Market

Abstract

This study examines the ability of investor sentiment to predict conditional
volatility and excess returns at both aggregate market and industry level in
Pakistani stock market. Following the top-down-approach, a broad band
investor sentiment index for Pakistan has been developed to empirically test
this issue. A significantly positive contemporaneous as well as negatively
lagged effect of investor sentiment is found on excess returns at aggregate
market and industry level. It has also been confirmed that bullish (bearish)
sentiment increases (decreases) volatility which in-turn affect the mean
variance relationship. However, the commonality of the effect of investor
sentiment via conditional volatility has not been uniform across industries