The effect of investor sentiment on stock returns: The evidence from OECD countries

In this study, the effect of investor sentiment on stock returns in OECD countries was investigated. In this direction, monthly data on the stock market indices, consumer confidence index (TGE), volatility index (VIX) and trading volume (IH) of 17 OECD countries for the period February 2004-August 2021 were used. In addition, the interest rate was added to the model as a control variable. The cointegration tests showed that there is a long term relationship between investor sentiment and stock market index. The short and long term effects of investor sentiment on the stock market are analyzed using the ARDL model. It has been determined that consumer confidence index has positive and significant effects on the stock market index both in the short and long term, and VIX has negative and significant effects in both the short and long term. It has been determined that trade volume and interest rate has a significant and negative effect only in the long term. The causality relationship between investor sentiment and stock market index was examined by Emirmahmutoğlu and Köse (2011) Bootstrap Causality Test. Analysis results show that TGE, VIX, IH and interest rate granger cause stock market index. In addition, Hatemi-J (2012) asymmetric causality test, which is an approach that shows the causality relationship between the variables separately according to positive and negative shock situations, was carried out. It has been determined that there is a bidirectional causality relationship at the 1% significance level from the positive shocks in the consumer confidence index to the positive shocks in the index price and from the negative shocks in the consumer confidence index to the negative shocks in the stock market index price. An asymmetric causality relationship from the positive or negative shocks in VIX to the stock market index price could not be determined. The stock market index price responds to negative shocks rather than positive shocks in trading volume. According to the variance decomposition analysis results, the most effective variable on the variance of the stock market index price is the consumer confidence index. it has been determined that one standard deviation shocks that may occur in the TGE, VIX, IH and iterest rate variables have a two-month effect on the stock market index price, fluctuating in the following months and reaching the long-term equilibrium value.