Effect Of Investors‘ Sentiment On Stock Market Returns

Filed in Articles by on November 24, 2022

 – Effect Of Investors‘ Sentiment On Stock Market Returns In Nigeria –

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The study examined the effect of investors’ sentiment on stock market return in Nigeria with consideration to bull and bear market cycles which most past studies neglected.

The dependent variable was proxy by Stock Market Returns (SPR) while the explanatory variables were investors sentiment (SentPCA), Interest Rate(INTR), Inflation Rate (INFL) and Exchange Rate (EXRT).

While bull events (positive market returns) and bear market event (negative market returns) were used as moderating variables to investors sentiment.

In this study, quarterly data from 1985Q1 to 2014Q4 were collected from secondary sources such as CBN, NSE and SEC while in the estimation of the models formulated, statistical techniques which include descriptive statistics, correlation analysis, unit root test, Engel-Granger co-integration test, overparameterized and Parsimonious error correction model (ECM) were adopted.

The results from the study show that investors’ sentiment had a statistically significantly relationship with stock market returns dynamics in Nigeria but when moderated for bear market cycle, the impact of investors sentiment on stock returns in Nigeria became statistically insignificant.

In the case of Bull market cycle, it was observed that there was a statistically significant relationship between investors’ sentiment and stock market returns. We also found that exchange rate variation was more potent in distorting stock market returns dynamics in Nigeria than interest rate and inflation rate.


Title Page ———— i
Declaration —– ii
Certification ——- iii
Dedication ——– iv
Acknowledgement ——— v
Abstract ——— vii
Table of Content —– viii
List of Tables —– ix
List of Figures ———- x


1.1 Background to the Study ——- 1
1.2 Statement of the Problem—- 4
1.3 Objectives of the Study——– 9
1.4 Research Hypotheses—— 10
1.5 Significance of the Study —- 11
1.6 Scope of the Study —- 12


2.1 Introduction ——- 14
2.2 Concept of Investors Sentiment ——- 14
2.2.1 Development of Investors Sentiment — 16
2.2.2 Measurement of Investors Sentiment — 20
2.3 Alternative Approaches to Market Sentiment —- 28
2.3.1 Macro Approach —-28
2.3.2 Micro Approach ——- 41
2.4 Bull and Bear Market Cycle ——- 42
2.5 Review of Empirical Literature —- 44
2.5.1 Investors Sentiment under Bull and Bear Market Cycle ——- 54
2.6 Theoretical and Conceptual Framework —– 60


3.1 Introduction ——— 68
3.2 Research Method ——– 68
3.2.1 Population and Sampling Techniques —- 69
3.3 Model Specifications — 70
3.4 Definition of Variables — 72
3.4.1 Dependent Variable ——– 72
3.4.2 Independent Variable —– 73
3.5 Data Collection ——– 81
3.6 Data Analysis Techniques — 82
3.6.1 Error Correction Model (ECM) ——–84
3.7 Justification of Data Analysis Used —- 87


4.1 Introduction ———— 88
4.2 Descriptive Statistics —— 89
4.3 Correlation Matrix ——– 93
4.4 Test of Mean Difference——- 95
4.5 Unit root test —– 96
4.6 Co-integration test ——— 98
4.7 Error Correction Model (ECM) —– 99
4.7.1 Tested Model 1— 99
4.7.2 Tested Model 2 ——–103
4.7.3 Tested Model 3——- 108
4.8 Summary of Findings——– 112


5.1 Summary —- 115
5.2 Conclusion —— 116
5.3 Recommendations —– 116
5.4 Limitation of the Study — 119
5.5 Suggestions for Further Studies– – 119
5.6 Contribution to Knowledge—– 120


Stock market prices both in developed and emerging countries are generally believed to be responsive to economic and market fundamentals or new information.

The event of 2008/2009 market crash which led to a wide deviation of stock prices from their fundamental value is generating questions and drawing attention to finding out if non-market and non-economic fundamentals are responsible for such deviations.

The determination of equity price movement in most emerging stock markets has been discussed by scholars and researchers from the perspective of market, economic and firm-specific fundamentals.

However, there has been some kind of shift in the discussion of equity price movement to favoring investors‘ sentiment/emotions.

Investors‘ sentiment in general term refers to the attitude, emotions and biases that exhibit in the course of investment decision.

Baek, Bandopadhaya and Du (2005) studies revealed that most short-term movements in asset prices such as equity are best explained by investors‘ sentiment. Similarly, Fisher and Stantunan (2000)are also of the view that investors‘ sentiment matter to asset pricing process.


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