Impact of Investor Sentiments on the

Indian Stock Market Returns

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE
REQUIREMENT OF THE TWO YEAR (FULL-TIME) POST GRADUATE DIPLOMA
IN MANAGEMENT 2014-2016

BY
Narender Gupta
002/2014
UNDER THE GUIDANCE OF
DR. Pankaj Varshney

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

January 2016

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ACKNOWLEDGEMENT
I hereby extend my heartfelt gratitude to all those people who helped me
in completing my project successfully. I was fortunate to have worked
under the guidance of Dr. Pankaj Varshney whose experience and
knowledge of the project helped me cross the hurdles smoothly and led to
the successful completion of the project. No amount of written expression
can show my deepest sense of gratitude to my Research guide who
motivated me to receive enormous amount of input and inspiration at the
various stages during my project preparation and assisted me in bringing
out my project in the present form.

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LAL BAHADUR SHASTRI INSTITUTE OF

MANAGEMENT, DELHI
Dated
DECLARATION
This is to certify that the present study i.e. Impact of Investor sentiments
on the Indian Stock Market returns is based on my original research work
and my indebtedness to others works, publications, etc. wherever cited in
this study has been duly acknowledged at appropriate places.
This work has not been submitted either in part or in full for the award of
any diploma or degree in any university, and is now being submitted for
evaluation in partial fulfillment for the requirement of the Two-year Full
Time Post-Graduate Diploma in Management.

(Narender Gupta)

Dr. Pankaj Varshney

Faculty Guide

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EXECUTIVE SUMMARY
Sometimes there exists a correlation between investor sentiment
indicators like business confidence index, Purchase Managers Index,
Sensex and the stock market returns in different industries. This paper
examines the last 10 year stock market returns in different sectors like
healthcare, manufacturing, IT, FMCG and the extent of their correlations
with various investor sentiment indicators like business confidence index,
Purchase Managers Index, Sensex.

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Table Of Contents

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Abstract
Introduction
Literature Review
Objectives
Research Methodology
Various Terminologies
Output Of Regression
Analysis of FMCG
Sector

6
7
9
10
11
12
15

Output Of Regression
Analysis of IT Sector

16

Output Of Regression
Analysis of
manufacturing Sector

17

Output Of Regression
Analysis of healthcare
Sector

19

Conclusion and Overall

Findings
Limitations
References

21
22
23

Abstract
The Indian Stock Market
With over 20 million shareholders and over 10,000 listed companies on all the stock
exchanges, India has the third largest investor base in the world after United States
of America and Japan. The Indian stock markets are serviced by 9400 stock brokers
approximately. Foreign brokers account for 29 of these. Any market that has
experienced this sort of growth has an equally substantial demand for highly
efficient settlement procedures. Indian stock markets, in the recent years, have
sharply risen on the back of improving macroeconomic fundamentals and large
inflow of foreign money. Large foreign investments have brought greater
transparency and liquidity into the Indian market. India entered the International
Financial Markets to mobilize resource towards the end of the 1970s around the
time of the launch of Fourth Five Year Plan. The Indian Stock Markets are in a way
the engines which drive the vehicle of our democracy by pumping in the much
needed capital. Their behavior and trends have intrigued many a scholar, many an
analyst and many an investor. As time evolved, scholars and intellectuals
propounded various theories and came up with different propositions with respect to
the Stock Markets.
In a country like India where the stock market is undergoing significant
transformation with the liberalization measures, there are also concerns regarding
its exposure to risk in case of global/regional crises i.e. need to know how far
contagion can affect the Indian stock market in a more and more globally integrated
environment. The degree of financial openness is an empirical question which needs
to be resolved and if policy makers are to know the structure of their economies and
implement policies that will be effective in achieving their aims. The Indian capital
market has been experiencing a process of structural transformation in that the
operations in the Indian capital market are being conducted on the standard
equivalent to those in the international developed markets.

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INTRODUCTION
Financial professionals know very well the fact investors psychology impacts the
financial markets. The investors mood and its influence on the market movements
is regularly discussed in various financial periodicals, on television, internet and
radio. As pointed out by Daniel Kahneman in a speech titled "Psychology and
Market" at North-Western University in 2000: "If you listen to financial analysts on
the radio or on TV, you quickly learn that the market has a psychology. Indeed, it
has character. It has thoughts, beliefs, moods, and sometimes stormy emotions."
"Are Indian Stock Markets driven more by investor Sentiments than Fundamentals ".
This inquisitiveness led the researcher to take up the research. This research project
is the quest to find an answer to this question which perhaps affects & intrigues
every probable investor or trader in the Indian Stock Market.
The Indian Stock Market
With over 20 million shareholders and over 10,000 listed companies on all the stock
exchanges, India has the third largest investor base in the world after United States
of America and Japan. The Indian stock markets are serviced by 9400 stock brokers
approximately. Foreign brokers account for 29 of these. Any market that has
experienced this sort of growth has an equally substantial demand for highly
efficient settlement procedures. In India 99.9% of the trades, according to the
National Securities Depository, are settled in dematerialized form in a T+2 rolling
settlement the capital market is one environment.
Indian stock markets, in the recent years, have sharply risen on the back of
improving macroeconomic fundamentals and large inflow of foreign money. Large
foreign investments have brought greater transparency and liquidity into the Indian
market. India entered the International Financial Markets to mobilize resource
towards the end of the 1970s around the time of the launch of Fourth Five Year Plan.
The Indian Stock Markets are in a way the engines which drive the vehicle of our
democracy by pumping in the much needed capital. Their behavior and trends have
intrigued many a scholar, many an analyst and many an investor. As time evolved,
scholars and intellectuals propounded various theories and came up with different
propositions with respect to the Stock Markets.
While the US remains the largest of the financial markets; the euro zone has
emerged as a financial powerhouse indeed. The euro zone, U.K. and U.S. account for
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some 80% of all cross border capital flows. In contrast, Japan is strikingly isolated;
its capital flows are smaller than China although chinas stock of financial assets is
only one quarter of the size of Japans. The underlying force for integration is that
people want freedom to make economic decisions and to access different forms of
finance, 13

risk management techniques and investment and portfolio diversification

opportunities. In a country like India where the stock market is undergoing
significant transformation with the liberalization measures, there are also concerns
regarding its exposure to risk in case of global/regional crises i.e. need to know how
far contagion can affect the Indian stock market in a more and more globally
integrated environment. The degree of financial openness is an empirical question
which needs to be resolved and if policy makers are to know the structure of their
economies and implement policies that will be effective in achieving their aims. The
Indian capital market has been experiencing a process of structural transformation
in that the operations in the Indian capital market are being conducted on the
standard equivalent to those in the international developed markets.
The Indian Capital Markets are mainly affected by two Es
1. Earnings/Price Ratio It is an important factor affecting the stock price of a
company. It gives us a fair idea of companys share price when it is compared to its
earnings. The stock becomes undervalued if the price of the share is much lower
than the earnings of a company. But if this is the case, then it has the potential to
rise in the near future. The stock becomes overvalued if the price is much higher
than the actual earning of the company.
2. Sentiments - They are a huge part of investing. Was it the case that only
earnings drove the Indian Sensex to a high of 21,000 points in January 2008 and a
low of 8700 points in October 2008? Not really. Emotions played a big part in both
the rise and fall of the Sensex. When we get positive news about a company, it
increases the buying interest in the market. On the other hand, when there is a
negative press release, it ruins the prospect of a stock to increase in value.

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Literature Review
The theoretical standpoint of traditional classical finance literature with an assumption of ideal
efficient financial market with zero arbitrage opportunity and rational risk averse investor behavior
leaves no room for the role of investor sentiment in the financial market. However, the theoretical
stand of traditional finance failed time and again to explain unconventional boom and bust in the
financial market behavior due to the uninformed demand and supply shocks. Over the past decade in
an attempt to answer the unconventional market movement with excess optimism and pessimism, the
investigation of possible impact of investor sentiment on stock market has been a subject of
considerable debate in the finance and economic literature. As an alternative to traditional finance
paradigm the behavioral approach to asset pricing seeks to answer such inconsistent market
phenomena by considering market participants imperfectly rational rather fully rational. In a more
formal way investor sentiment in the behavioral asset pricing literature has been defined as the
systematic error or biases in investors belief about future cash flows and investment risks that are
inconsistent with the fundamental facts (Baker and Wurgler, 2006; Shefrin, 2005). Behavioral
approach to asset pricing suggests two fundamental arguments towards the sentiment driven
mispricing in financial markets. First, the role of psychological biases (Kahneman and Tversky,
1979) among investorsbehaviour. Second, the costly arbitrage opportunity and short sell constraints
in the market for determining stock prices (Brown and Cliff, 2005; Shleifer and Vishny, 1997).

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Objectives
1. To investigate the role of investor sentiment in the asset pricing mechanism.
2. To evaluate the pricing implications of market-wide investor sentiment risk for stock
return variations of Indian listed companies across industry groups
3. To find the correlation between various sentiment indicators.

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Research Methodology:

Study of stock market volatility for the same period of time of the BSE-Sensex (Bombay
Stock Exchange- Sensitive Index).

Collection of quarterly data of business confidence index, Purchase Managers Index

sentiments and average daily returns (across different industry groups) from various
sources like BSE, CII for the same period.

To find the impact of each index on the average quarterly returns, SPSS is incorporated.

To strengthen the research, various financial journals and literature on the subject has
been reviewed

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Various Terminologies
Business Confidence Index
CIIs Business Outlook Survey covers all industry sectors, including small, medium and large
enterprises from different regions. The survey, enumerates responses across the spectrum of
industry groups both in public and private sectors engaged in manufacturing activities (60%) and
in service sectors (40%). The CII Business Confidence Index is constructed using a weighted
average of the Current Situation Index and the Expectations Index. These indices are based on
three questions on the performance of the economy, respondents industry sector and
respondents company. Respondents are asked to rate the current and expected performance on a
scale of 0 to 100. A score above 50 indicates positive confidence while a score above 75 would
indicate strong positive confidence. In the construction of the two sub indices, the highest weight
is given to the questions related to the performance of the individual company, and the lowest
weight is assigned to the questions on the economy. The weights are assigned on the basis of the
premise that the average respondent would possess more detailed and accurate knowledge on the
current and expected performance of his own company than the economy as a whole.

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Business Confidence Index

80
70
60
50
40
30
20
10
0

Business Confidence Index

Purchase Managers Index

The PMI is a composite index of five "sub-indicators", which are extracted
through surveys to more than 400 purchasing managers from around the
country, chosen for their geographic and industry diversification benefits.
The five sub-indexes are given a weighting, as follows:

Production level (.25)

New orders (from customers) (.30)

Supplier deliveries - (are they coming faster or slower?) (.15)

Inventories (.10)

Employment level (.20)

A diffusion process is done to the survey answers, which come in only three
options; managers can either respond with "better", "same", or "worse" to
the questions about the industry as they see it. The resulting PMI figure
(which can be from 0 to 100) is calculated by taking the percentage of
respondents that reported better conditions than the previous month and
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adding to that total half of the percentage of respondents that reported no

change in conditions. For example, a PMI reading of 50 would indicate an
equal number of respondents reporting "better conditions" and "worse
conditions".

PMI
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00

PMI

SENSEX
The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), alsocalled the BSE 30 or simply the SENSEX, is a free-float marketweighted stock market index of 30 well-established and financially sound
companies listed on Bombay Stock Exchange. The 30 component companies
which are some of the largest and most actively traded stocks are
representative of various industrial sectors of the Indian economy
Calculation
The BSE has some reviews and modifies its composition to be sure it reflects
current market conditions. The index is calculated based on a free float
capitalization method, a variation of the market capitalization method.
Instead of using a company's outstanding shares it uses its float, or shares
that are readily available for trading. As per free float capitalization
methodology, the level of index at any point of time reflects the free float
market value of 30 component stocks relative to a base period. The market
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capitalization of a company is determined by multiplying the price of its

stock by the number of shares issued by of corporate actions, replacement of
scrips, The index has increased by over twenty five times from June 1990 to
the present.

sensex
30000
25000
20000
15000
10000
5000
0

sensex

Calculation of Stock Returns of Various Industries

Stock Return= (Index or Price at T+1-Index or Price at T)/Index or Price at
T*100
Regression Analysis
Using SPSS, regression analysis was done with stock returns of each sector
as dependent variable and Purchase Managers Index(PMI), Business
Confidence Index(BCI) and Sensex(SI) as independent variables.
Output Of Regression Analysis of FMCG Sector

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Variables Entered/Removeda
Model

Variables

Variables

Entered

Removed

Method

SENSEX,
1

Business

. Enter

Confidence
Index, PMIb

a. Dependent Variable: FMCG

b. All requested variables entered.

Model Summary
Model

.472a

R Square

Adjusted R

Std. Error of the

Square

Estimate

.223

.158

5.828

a. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

ANOVAa
Model

Sum of Squares
Regression

df

Mean Square

351.232

117.077

Residual

1222.668

36

33.963

Total

1573.900

39

Sig.
.027b

3.447

a. Dependent Variable: FMCG

b. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

Coefficientsa
Model

Unstandardized Coefficients

Standardized

Sig.

Coefficients
B
(Constant)
1

Business Confidence Index

PMI
SENSEX

a. Dependent Variable: FMCG

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Std. Error
-6.833

11.924

-.093

.151

.511
-.001

Beta
-.573

.570

-.107

-.616

.542

.221

.405

2.316

.026

.000

-.535

-2.829

.008

Analysis and Findings

1. The three independent variables PMI, BCI, SI account for 22.3 percent
variation in stock market returns for FMCG sector. Overall results of the
test is significant since it is less than .05.Of the three variables two
variables namely PMI and SENSEX account for majority of the variation
in the stock returns.

Output Of Regression Analysis of IT Sector

Variables Entered/Removeda
Model

Variables

Variables

Entered

Removed

Method

SENSEX,
1

Business

. Enter

Confidence
Index, PMIb

a. Dependent Variable: IT
b. All requested variables entered.

Model Summary
Model

R Square

.465a

Adjusted R

Std. Error of the

Square

Estimate

.216

.151

6.469

a. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

ANOVAa
Model

Sum of Squares
Regression

df

Mean Square

414.662

138.221

Residual

1506.313

36

41.842

Total

1920.975

39

a. Dependent Variable: IT
b. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

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F
3.303

Sig.
.031b

Coefficientsa
Model

Unstandardized Coefficients

Standardized

Sig.

Coefficients
B
(Constant)
1

Std. Error

-21.833

13.235

Business Confidence Index

.041

.168

PMI

.597
-.001

SENSEX

Beta
-1.650

.108

.043

.243

.809

.245

.428

2.438

.020

.000

-.383

-2.017

.051

a. Dependent Variable: IT

Analysis and Findings

The three independent variables PMI, BCI, SI account for 21.6 percent
variation in stock market returns for IT sector. Overall results of the test is
significant since it is less than .05.Of the three variables two variables
namely PMI and SENSEX account for majority of the variation in the stock
returns.

Output Of Regression Analysis of Manufacturing Sector

Variables Entered/Removeda
Model
1

Variables Entered
SENSEX, Business
Confidence Index, PMIb

a. Dependent Variable: Manufacturing

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Variables Removed

Method
. Enter

b. All requested variables entered.

Model Summary
Model

R Square

.629

.396

Adjusted R

Std. Error of the

Square

Estimate

.345

3.663

a. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

ANOVAa
Model

Sum of Squares df

Mean Square

Sig.

Regression

316.102

105.367

7.855

.000b

Residual

482.912

36

13.414

Total

799.015

39

a. Dependent Variable: Manufacturing

b. Predictors: (Constant), SENSEX, Business Confidence Index, PMI
Coefficientsa
Model

Unstandardized

Standardize

Coefficients

Sig.

-.149

.882

Coefficients
B

Std. Error

-1.117

7.494

.057

.095

.092

.598

.554

PMI

-.043

.139

-.048

-.313

.756

SENSEX

.001

.000

.682

4.084

.000

(Constant)
Business Confidence
1

Index

Beta

a. Dependent Variable: Manufacturing

Analysis and Findings
The three independent variables PMI, BCI, SI account for 39.6 percent variation in stock market
returns for manufacturing sector. Overall results of the test is significant since it is less than .05.Of
the three variables two variables namely PMI and SENSEX account for majority of the variation in
the stock returns.

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Output Of Regression Analysis of Healthcare Sector

Variables Entered/Removeda
Model

Variables

Variables

Entered

Removed

Method

SENSEX,
1

Business

. Enter

Confidence
Index, PMIb

a. Dependent Variable: healthcare

b. All requested variables entered.

Model Summary
Model

R Square

.197a

Adjusted R

Std. Error of the

Square

Estimate

.039

-.041

6.007

a. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

ANOVAa
Model

Sum of Squares
Regression

df

Mean Square

52.407

17.469

Residual

1299.193

36

36.089

Total

1351.600

39

Sig.
.695b

.484

a. Dependent Variable: healthcare

b. Predictors: (Constant), SENSEX, Business Confidence Index, PMI

Coefficientsa
Model

Unstandardized

Standardized

Coefficients

Coefficients

B
(Constant)
Business Confidence
1

Index
PMI
SENSEX

a. Dependent Variable: healthcare

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Std. Error

-9.202

12.291

.169

.156

-.018
.000

Sig.

Beta
-.749

.459

.211

1.086

.284

.227

-.015

-.078

.938

.000

.152

.723

.474

Analysis and Findings

The three independent variables PMI, BCI, SI account for mere 3.9 percent variation in stock
market returns for Healthcare sector. Overall results of the test are non-significant since it is
greater than .05. Neither of the three variables two variables namely account for the variation in
the stock returns.

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Conclusion and Overall Findings

FMCG and manufacturing sectors seemed to be more affected by the
sentiment indicators than the IT and healthcare sector .Indias manufacturing
sector as always is plagued by a no of problems arising from bureaucratic
inefficiency, non-uniform taxation policies, lack of single window clearance,
policy paralysis within the government etc. The investor sentiments are
greatly affected by these issues which in return affect Indias manufacturing
potential. Indias FMCG sector has significant dependence on rural demand
which further depends upon monsoons. Thus monsoons in India greatly
affect investor sentiments. IT sector which contributes mainly to Indias
service exports is fairly robust in India and is relatively less affected by
sentiment indicators. HealthCare sector obviously is least dependent upon
sentiment indicators as the industry suffers from inelastic demend.

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Limitations Of the Study

The three sentiment indicators do not capture the full sentiment of

investors as there are other indicators like consumer sentiment index
for which limited data is available.
Sentiment indicators cannot alone indicate the stock returns of an
industry as they also depend upon macroeconomic and microeconomic
factors, important global and national events. So, this study is limited
to find the extent of impact these indicators have on various industry
groups.

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References

www.bseindia.com

www.irmbrjournal.com

http://esource.dbs.ie/handle/10788/1707?show=full.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2258330

http://www.academicjournals.org/article/article1380725145_Bennet%20et%20al.pdf

http://people.stern.nyu.edu/jwurgler/papers/wurgler_baker_investor_sentiment.pdf

https://research.stlouisfed.org/fred2/series/NAPM/downloaddata

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