Sentiment and Stock Returns of Individual Investors at the Nairobi Securities Exchange

Abstract

Sentiment is a subject that has intrigued researchers lately because asset prices seem to follow a different trajectory from the one predicted by traditional finance models. The trading behaviour does not appear to be based on asset fundamentals but on subjective criteria, which is contrary to classical finance arguments supporting investor rationality in decision making. Therefore, the objective of this study was to examine the impact of investor sentiment on stock returns of individual investors at the Nairobi Securities Exchange.  The study adopted a positivistic approach where primary data was collected to test the relationship of the study variables. In this research investor sentiment was categorized into three groups; joy-optimism for high moods, neutral-objective for rationality and sad-pessimism for low moods. Stock returns which estimated performance were measured using Sharpe ratio. 270 questionnaires were analysed which represented a 70.3% response rate. A correlational descriptive survey was conducted to examine the relationship between investor sentiment and Sharpe ratio. Spearman’s correlation was used to estimate the correlation between investor sentiment and Sharpe ratio. Stepwise regression and ANOVA were applied to analyse the relationship among the variables. The study found that investor sentiment had no influence on Sharpe ratio. Thus, from the findings the study concluded that relying on investor sentiment to make decisions may not yield optimal decisions. These insights would be beneficial to practitioners, investors, policy makers and all market players at large. The knowledge about investor sentiments and different aspects that relate to trading can improve investment decisions and overall performance of the market.

Keywords: Investor Sentiment, Stock Returns, Sharpe Ratio, Individual Investors