Investor’s sentiment and stock return: an empirical study on the Thai Stock Market

Abstract

The effect of investor sentiment on stock returns is one of the most recent developments in finance. The empirical literature includes developed stock markets. However, emerging markets, notably the Thai stock market, lack study subjects. The purpose is to deeply comprehend the link between investor sentiment and Thai stock market return. The aims include customizing investor sentiment indices to explain the Thai stock market index's movement, estimating investor sentiment's predictive ability, providing stock investors with referable trading strategies, and providing suggestions for cross-section equity selection.

This study initially employs Principal Component Analysis (PCA) to customize the composite indices, called the investor sentiment indices, using the local and global levels based on eight underlying indicators extracted from prior research. Second, the paper examines and compares the forecasting performance of the Martingale model, the Autoregression model, and the Multivariate Threshold Autoregressive models (MTAR) using local and global sentiment indices. Thirdly, the paper develops trading strategies based on the predicting models and the fluctuating investor sentiment. Fourthly, the paper examines the impact of investor sentiment on the various features of the Thai stock portfolio.

The paper's results suggest that 1) the customized investor sentiment has researchable explanatory power to the Thai market index return. 2) the customized investor sentiments significantly cause the return of the Thai stock market. 3) using the rolling out-of-sample technique, the customized investor sentiment accurately forecasts the Thai market index returns more than other empirical predictive models. 4) the trading strategy based on the customized investor sentiment model provides higher predicted returns than trading strategies based on other empirical models. 5) Thai stocks with high dividends, high tangible assets, high liability, low profitability, and value premium are susceptible to customized investor sentiments.