An empirical examination of the effect of investor sentiment on market return and volatility: Evidence from Saudi Arabia

Abstract

Despite voluminous prior research, the effect of investor sentiment on market returns and volatilities is still unclear, especially in developing markets. The previous studies outcomes are mixed due to the challenges of picking the accurate investor sentiment proxy. In this dissertation, different proxies have been used to reflect the investors' sentiment to investigate its role in the Saudi Stock Exchange (the largest stock market in the Middle East and North Africa). Through using the regression model and time-series data, this study examines 136 monthly market returns and volatilities from March 2010 to June 2021. The results show that investor sentiment negatively impacts future market returns while positively impacting contemporaneous and future volatility. These findings confirm the assumption that investor sentiment has a significant impact on the stock market. However, results differ across sentiment proxies, indicating that not all proxies measure the same aspect of investor sentiment.