The Effect and Prediction of Investor’s Sentiment on Equity Return: An Empirical Study on the Thai Stock Market

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Chang Chen
Sira Suchintabandid


One of the essential questions in finance is whether investor sentiment significantly affects stock returns. The empirical literature has expanded the study to the developed stock markets. However, the emerging markets lack the subject of study, especially the Thai equity market. The purpose is to understand further the relationship between investor sentiment and Thai stock market returns. The objectives include constructing investor sentiment indexes to reflect the Thai stock aggregate movement, estimating the predictive ability of investor sentiment, and providing referable trading strategies for equity investors.


The empirical sample period is from 1999 to 2019. This paper uses the first Principal Component Analysis to construct the investor sentiment indexes at the domestic and global levels based on eight underlying proxies extracted from literature and then classifies the Thai stock market states using investor sentiment. Second, the paper compares the predictive errors of the Martingale model, the Autoregression model, and the Multivariate threshold autoregressive models using the sentiment indexes. Third, the paper designs trading strategies based on the sign of either models’ projection or investor sentiment fluctuation to generate investors’ profit.


The results show that 1) Investor sentiment strongly reflects the aggregate return movement of the Thai market, especially the local index. 2) The investor sentiment accurately forecasts the Thai stock aggregate movement using the out-of-sample method. 3)The trading strategy based on investor sentiment provides higher predicted returns than other empirical models. The paper suggests that taking the investor sentiment into regular financial reference would benefit the equity investors.

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