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In this paper we examine definitional aspect of Investor Sentiment, the key economic, market and regulatory factors that influence investor sentiment and the relationship between investor sentiment and market performance. There seems to be no clear consensus on the concept of investor sentiment and hence any meaningful definition ought to be inclusive and fluid. The important economic factors highlighted in the work are: Real GDP, Corporate Profits, Rate of Inflation, Level of Interest Rate, and Liquidity in the Economy. The market based factors that can be linked to Investor Sentiment are: Put Call Ratio, Advance Decline Ratio, Earning Surprises, P/E Ratio, and Price to Book Value. The regulatory framework of a financial market does seem to have a strong bearing on investor sentiment especially the legal provisions relating to corporate governance and Grievance Redressal Mechanism. Most respondents believe that investor's sentiment and market returns are bilaterally co-related. Our findings are largely in conformity with recent studies for other capital markets. These findings can be used to develop a comprehensive Investor Sentiment Index for India and hence have significant implications for investors, market intermediaries and financial regulators.
Key words: Investor Sentiment, Market Sentiment, Market Performance, Asset Pricing, Risk Appetite
INTRODUCTION
Sentiment prevailing in the capital markets is a critical driver of the economy as it influences the business cycle and financial fluctuations in an economy. Investor Sentiment translates into investor confidence or lack of it and acts as a proxy for collective investor behaviour and affects the stock market. There is a growing body of both theoretical and empirical literature that examines the role of investor sentiment and its implications for financial markets and institutions. This literature has improved our understanding of some financial anomalies documented in prior work, such as the predictability in stock returns, excessive trading volatility and evidence on investors' under or over reaction to corporate announcements. As a result, contemporary research explores the drivers of their behaviour, trading patterns and implications for market efficiency. However, most evidence remains controversial, at best, and the debate about sources of investor sentiment and the importance of sentiment's impact on asset prices is still continuing (Ronald Domingues, 2008).
As the volume of studies that use investor sentiment to understand shifts in asset prices grows,...