EFFECT OF INVESTORS SENTIMENT ON STOCK MARKET RETURNS IN NIGERIA

CHAPTER ONE

INTRODUCTION 

1.1        Background of the study

1.2        Statement of problem

1.3        Objective of the study

1.4        Research Hypotheses

1.5        Significance of the study

1.6        Scope and limitation of the study

1.7       Definition of terms

1.8       Organization of the study

CHAPETR TWO

2.0   LITERATURE REVIEW

CHAPETR THREE

3.0        Research methodology

3.1    sources of data collection

3.3        Population of the study

3.4        Sampling and sampling distribution

3.5        Validation of research instrument

3.6        Method of data analysis

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS AND INTERPRETATION

4.1 Introductions

4.2 Data analysis

CHAPTER FIVE

5.1 Introduction

5.2 Summary

5.3 Conclusion

5.4 Recommendation

Appendix

 Abstract

The study examined the effect of investors’ sentiment on stock market return in Nigeria with consideration to bull and bear market cycles which most past studies neglected. The dependent variable was proxy by Stock Market Returns (SPR) while the explanatory variables were investors sentiment (SentPCA), Interest Rate(INTR), Inflation Rate (INFL) and Exchange Rate (EXRT), while bull events (positive market returns) and bear market event (negative market returns) were used as moderating variables to investors sentiment. In this study, quarterly data from 1985Q1 to 2014Q4 were collected from secondary sources such as CBN, NSE and SEC while in the estimation of the models formulated, statistical techniques which include descriptive statistics, correlation analysis, unit root test, Engel-Granger co-integration test, overparameterized and Parsimonious error correction model (ECM) were adopted. The results from the study show that investors’ sentiment had a statistically significantly relationship with stock market returns dynamics in Nigeria but when moderated for bear market cycle, the impact of investors sentiment on stock returns in Nigeria became statistically insignificant.

 CHAPTER ONE

INTRODUCTION

• Background of the study

Stock market prices both in developed and emerging countries are generally believed to be responsive to economic and market fundamentals or new information. The event of 2008/2009 market crashwhich led to a wide deviation of stock prices from their fundamental value is generating questions and drawing attention to finding out if non-market and non-economic fundamentals are responsible for such deviations. The determination of equity price movement in most emerging stock markets has been discussed by scholars and researchers from the perspective of market, economic and firm-specific fundamentals.However, there has been some kind of shift in the discussion of equity price movement to favouringinvestors‘ sentiment/emotions. Investors‘ sentiment in general term refers to the attitude, emotions and biases that exhibit in the course of investment decision. Baek, Bandopadhaya and Du (2005) studies revealed that most short-term movements in asset prices such as equity are best explained by investors‘sentiment. Similarly, Fisher and Stantunan (2000)are also of the view that investors‘ sentiment matter to asset pricing process. Thus, in the pricing of equities and other financial assets, investors‘ attitude is of major concern for financial analyst and it is seen as a key determinant of the value of most financial assets (Huiwen, 2012). Baker and Wurgler (2006) recognized investors‘ psychology as a vital component in market pricing process of financial assets. This is because the sentiment of investors‘may also reflect their risk profile and investors‘emotion are displayed in different forms. In behavioral finance, emphasis is placed on investors‘sentiment/bias such as escalation, cognitive dissonance and overconfidence bias. Escalation bias tend to exist when an investor continue to purchase a poor performing stock with the notion that the stock poor performance is temporary, this single act of investors‘ can influence the price of the stock in question positively since the investors‘ are not selling even when bad news enter into the market. In the case of cognitive dissonance the investors‘act only when market information conforms to his belief. This therefore means that equity price moves only when the investors‘interpretation of an event negates the market news. Shefrin and Statman (1996) stressed that prices of equities and other financial assets are determined by the level of confidence investors‘have on the growth of a company. The investor commits overconfidence bias when he/she overestimates the growth rate of a company and concentrates on good news and this has great influence to the determination of financial assets prices.

1.2 STATEMENT OF THE PROBLEM

The conflict between the classical and behavioural finance theorists on the role of investor sentiment on asset prices is worth investigating in an undeveloped small size stock market like Nigeria. As developing and most emerging markets are dominated relatively more by individual investors that lack quality information and professional financial analysts’ services, the performances of these markets are more likely to be influenced by the sentiment of general investors. Short selling usually is either not allowed or it is very shallow in many developing and emerging stock markets and this is for all practical purposes the case of the Nigerian market as well. Hence, as expected, the absence of the mechanism of short selling makes it difficult for smart investors to respond quickly to any new information in order to align mispriced stocks. Despite the high possibility of presence of sentiment in the Nigeria capital market, there is hardly any known published papers dealing with the effect of sentiment. Thus, this paper investigates the performance of the Nigerian stock market primarily from behavioral perspective by introducing sentiment factors in the empirical asset pricing models

1.3 OBJECTIVE OF THE STUDY

The objectives of the study are;

1. To examine the relationship between changes in investor sentiment and stock market returns
2. To determine whether sentiment depends on previous returns or it is returns that depend on previous sentiment movements
3. To ascertain the effect of investors sentiment on stock market returns

1.4 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:   there is no relationship between changes in investor sentiment and stock market returns.

H₁: there is relationship between changes in investor sentiment and stock market returns.

H₀²: there is no effect of investor’s sentiment on stock market returns

H₂: there is effect of investor’s sentiment on stock market returns

1.5 SIGNIFICANCE OF THE STUDY

This study will give clear insight on effect of investors on stock market returns in Nigeria. This study will be benefitted to investors and government of Nigeria. It will also serve as reference to others researchers that will embark on this topic

1.6 SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the effect of investor’s sentiment on stock market returns in Nigeria. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities

1.7 DEFINITION OF TERMS

 INVESTOR SENTIMENT:  Market sentiment is the overall attitude of investors toward a particular security or financial market. For example, rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment.

STOCK MARKET: A stock market, equity market or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately. Examples of the latter include shares of private

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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