Title: On the impact of sentiment on stock returns: the case of Dhaka Stock Exchange

Authors: Shah Saeed Hassan Chowdhury; Rashida Sharmin; M. Arifur Rahman

Addresses: Department of Accounting and Finance, Prince Mohammad Bin Fahd University, 617 Al Jawharah, Khobar, Dhahran 34754, Saudi Arabia ' Graduate School of Business, Universiti Sains Malaysia, 11800 USM Pulau Pinang, Penang, Malaysia ' Department of Accounting and Finance, North South University, Bashundhara, 1229 Dhaka, Bangladesh

Abstract: Since frontier markets are dominated by less-informed individual investors, the stock price movements of these markets could be influenced by the sentiment of general investors. This paper investigates the effect of sentiment on the returns of the Dhaka Stock Exchange (DSE), the main stock exchange in Bangladesh. The study uses indirect measures of stock market sentiment. Results show that sentiment impacts contemporaneous returns, followed by some corrections in the next month. Contrary to general belief, large firms are more vulnerable to market sentiment. There is a unidirectional (Granger) causality from market turnover to portfolio returns, and a strong bi-directional causal relationship between moving average changes and stock returns. When conditional volatility is considered, a significant impact of sentiment is observed, mainly on small-size portfolios. In the presence of other market-wide risk factors, sentiment factors reasonably explain individual stock returns. Overall, the study concludes that sentiment should be considered as a source of systematic risk for the firms listed in the DSE.

Keywords: market sentiment; behavioural finance; emerging stock markets; Dhaka Stock Exchange; DSE; frontier stock markets; return predictability.

DOI: 10.1504/AAJFA.2021.115667

Afro-Asian Journal of Finance and Accounting, 2021 Vol.11 No.3, pp.392 - 422

Accepted: 13 Jan 2020
Published online: 16 Jun 2021 *

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