A Study on the Differential Impact of Investor Sentiment on Developing Stock Markets
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This study aims to investigate the differential impact of investor sentiment on stock market performance in developing countries. Drawing upon behavioral finance theories, the study analyzes the mechanisms through which investor sentiment—both optimistic and pessimistic—affects stock market returns and volatility. Utilizing panel data from ten representative developing markets between 2013 and 2023, the research constructs sentiment indices based on investor surveys, transaction records, and market sentiment indicators. Fixed-effects and random-effects regression models are employed, with macroeconomic factors included as control variables. The empirical results reveal that positive investor sentiment is significantly associated with rising stock market returns, while negative sentiment correlates with increased volatility and declining performance. These effects are particularly amplified in developing markets due to factors such as information asymmetry, weaker regulatory frameworks, and limited market liquidity. The study concludes that investor sentiment serves as a critical determinant of market dynamics in emerging economies. It offers practical implications for both regulators and investors: monitoring sentiment trends can inform regulatory interventions, while investors are encouraged to adopt rational strategies that account for sentiment-driven fluctuations.
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