Investor sentiment has emerged as a critical factor in explaining stock market fluctuations that cannot be fully understood through traditional economic fundamentals alone. This study investigates the relationship between investor sentiment and stock market returns using a global panel of 50 countries comprising developed and emerging economies over the period 2000–2025. To ensure robust empirical evidence, the study applies fixed-effects panel regression and the generalized method of moments estimator. The use of both static and dynamic estimation approaches enables the examination of immediate market responses as well as the persistence of stock market behavior over time. Furthermore, separate analyses are conducted for developed and emerging economies to identify potential differences in the sentiment–return relationship across varying institutional and market environments. The findings reveal a strong positive association between investor sentiment and stock market returns across the global sample. Fixed-effects estimation indicates that investor sentiment is a significant determinant of stock market performance in both developed and emerging economies, while lending interest rates exert a negative influence on market returns. Economic growth and inflation display limited explanatory power after controlling for country-specific effects. However, dynamic panel estimates demonstrate that stock market returns exhibit substantial persistence over time, and the direct influence of investor sentiment diminishes once endogeneity and dynamic adjustment processes are taken into account. These results explain that sentiment-driven effects are primarily short-term in nature and gradually fade as markets adjust toward equilibrium.
Bulletin of Business and Economics (BBE) (Tue,) studied this question.