The Effect of Investor Sentiment on Portfolio Returns: Evidence from the Pakistan Stock Exchange

Economic literature presents numerous factors for pricing stocks following the normative assumptions. However, a perfect model for elaborating the returns has not been developed. Therefore, the theory proposes behavioural aspects for determining portfolio returns. This study tests a behavioural attribute investor sentiment on portfolio returns of 682 listed stocks on the Pakistan Stock Exchange from 2001-2021 over 245 months. The results show that the sentiment index mimics the stock index during the sampling period. The OLS and Newey-West standard error regressions, verify that investor sentiment can explain size and book-to-market sorted portfolio returns. Furthermore, the sentiment also explains the decile portfolio returns of selected anomalies. The results reveal that sentiment is an independent risk factor. The findings of this enquiry are helpful for investors and analysts who may consider investor sentiment when making investment and portfolio formation decisions.