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Title The Role of Investor’s Sentiments in Stock Returns: Evidence from Pakistan Stock Exchange Listed Firms

Author(s) Namra Iqbal

Abstract This study investigates the impact of investor sentiments on stock returns in the Pakistani equity market, along with the effect of stock return volatility and the lead-lag relationship between sentiment indicators and returns. This research is the first to study investor sentiment proxies rather than a joint index with some novel proxies, i.e. share mispricing, bond yield spread, and gold bullion in the context of Pakistan. Unlike prior research that commonly uses a composite sentiment index, this study employs disaggregated sentiment proxies to capture distinct dimensions of investor psychology, which enhances precision in identifying their individual effects. This study uses panel data of 49 non-financial firms, taken quarterly from 2012-2019, covering 1464 observations of the unbalanced panel. The Fully Modified Ordinary Least Square model, Granger Causality Test and Vector Autoregressive Model are used in the study for hypotheses testing. The results support seven of nine hypotheses, covering all investor sentiments’ proxies: share mispricing, bond yield spread, gold bullion, consumer confidence index, turnover, advance-decline ratio and relative strength index. However, the hypothesis related to stock return volatility is rejected. Granger causality tests indicate a mixed lead-lag relationship, with unidirectional and indecisive patterns for some proxies. The VAR model further reveals significant lagged and directional effects of sentiment indicators on stock returns, confirming a dynamic lead-lag relationship. These findings align with existing literature from both developed and emerging markets. The policy implications are threefold: investors can optimize risk-return outcomes by incorporating sentiment signals; financial institutions may enhance risk assessment and product design; and policymakers can leverage sentiment analysis to stabilize markets. Despite data and methodological constraints, this study provides a novel lens into behavioural finance in Pakistan, offering a foundation for future research on investor psychology in frontier markets.

Type Thesis/Dissertation PhD

Faculty Management Sciences

Department Management Sciences

Language English

Publication Date 2025-09-10

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