Effect of Sentiment on the Bangladesh Stock Market Returns

This paper looks at Bangladesh stock market completely from behavioral perspective by introducing behavioral factors in the empirical asset pricing models. Lack of data of sentiment proxies constrains authors to use only few proxies, namely, TRIN (Trading Index), trade volume (turnover), number of IPOs per month and change in four-month moving average. We have found that TRIN and moving average significantly affect the residual market returns. This paper also investigates the impact of sentiment on returns of different size portfolios. Results show that the impact of TRIN and trade volume is strong for large and medium size portfolios. However, the effect of TRIN is either low or insignificant for small size portfolio, indicating less interest of investors for neglected stocks. Granger causality tests show that there is unidirectional causality from TRIN to stock returns and strong bi-directional causal relationship between moving average change and stock returns. When conditional volatility is taken into account, effect of sentiment on returns from market and size portfolios decreases and we mostly observe significant effect of sentiment on small size portfolios. Finally, in the presence of other market-wide risk factors, sentiment factors weakly explain individual stock returns. Overall, we conclude that sentiment is a non-negligible consideration for portfolio investors in Bangladesh