SENTIMENT, RISK APPETITE AND STOCK RETURNS OF INDIVIDUAL INVESTORS AT THE NAIROBI SECURITIES EXCHANGE
Abstract
Investor sentiment is a new area of study with the wider field of behavioural finance which argues that investors are irrational in making investment and do not rely on objective information to make decisions. Sentiment is not a stable reality since it fluctuates from optimism to pessimism since investors rely on rumours and instinct as decision criterion. The tendency to rely on bias and rumours by investors leads to heightened activity and increased risk in the market. Risk seeking traders tend to be optimistic and overactive in the market. Thus, Investor sentiments it is believed has the capacity to explain the phenomenon of market volatility which traditional models have not managed to do thus far. Nevertheless, there is no consensus on the role of investor sentiment on stock returns. Hence the objective of this study was to establish the relationship among sentiment, risk appetite and stock returns of individual investors at the NSE. The study adopted a positive orientation and a correlational descriptive survey. Primary data was collected using a structured questionnaire and the response rate was 70.3 %. The study using stepwise regression established that risk appetite had no mediating effect on the relationship between sentiment and stock returns of individual investors at NSE.
Keywords: Investor Sentiment, Risk Appetite, Stock Returns
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Trueman, B. (1988). A theory of noise trading in securities markets. The Journal of Finance, 43(1), 83-95.
Wooldridge, J. M. (2010). Econometrics analysis of cross section and panel data. London: The MIT Press.
Zhang, C. (2008). Defining, modelling, and measuring Investor Sentiment. University of California, http://citeseerx.ist.psu.edu/viewdoc.
American Association of Individual Investors. (2019, Feb 7). AAII Investor survey update. Retrieved from American Association of Individual Investors: www.aaii.com
Baker, H. K., Kumar, S., & Goyal, N. (2019). Personality traits and investor sentiment. Review of Behavioural Finance, 13(4), 354-369.
Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock Market. Journal of Economic Perspectives, 21(2), 129-151.
Barberis, N., Mukherjee, A., & Wang, B. (2016). Prospect Theory and stock returns: An empirical test. The Review of Financial Studies, 29(11), 3068-3107.
Bayar, Y., Sezgin, F. H., & Ozturk, O. F. (2020). Financial literacy and financial risk tolerance of individual investors: Multinomial Logistic Regression Approach. Sage Open, 10(3), 2158244020945717.
Blake, D., Cannon, E., & Wright, D. (2021). Quantifying loss aversion: Evidence from a UK population survey. Journal of Risk and Uncertainty, 63, 27-57.
Brooks, C., Sangiorgi, I., Saraeva, A., Hillendbrand, C., & Money, K. (2020). The importance of staying positive: The impact of emotions on attitude to risk. International Journal of Finance & Economics, https://onlinelibrary.wiley.com.ezproxy.library.strathmore.edu/doi/10.1002/ijfe.
Chang, C.-L., & Fang, M. (2020). Noise trading and abnormal return in stock market. Revista Argentina de Clinica Psicologica, 29(4), 317-324.
Dickason, Z., & Ferreira, S. (2018). Establishing a link between risk tolerance, investor personality finance in South Africa. Cogent Economics & Finance, 6(1), 1519898.
Fairchild, A. J., & Mackinnon, D. P. (2009). A general model for testing mediation and moderation effects. Prevention Science, Springer, 10(2), 87-99.
Gai, P., & Vause, N. (2018). Measuring investors’ risk appetite. International Journal of Central Banking-Bank of England, https://www.ijcb.org/journal/ijcb06q1a5.pdf.
Gonzalez-Hermosillo, B. (2008). Investor risk appetite and global financial market conditions. International Monetrary Fund Working Paper, WP/08/85
Hu, C., & Wang, Y. (2013). Noise trading and stock returns: evidence from China. China Financial Review International, DOI:10.1108/CFRI-02-2012-0017.
Kasoga, P. S. (2021). Heuristic biases and investment decisions: multiple mediation mechanisms of risk tolerance and financial literacy-a survey at the Tanzania stock market. Journal of Money and Business, 1(2), 102-116.
Lan, Q., Xiong, Q., He, L., & Ma, C. (2018). Individual investment decision behaviours based on demographic characteristics: Case from China. PLoS ONE, https://doi.org/10.1371/journal pone 0201916.
Malkiel, B. G. (2003). The efficient market hypothesis and its critics. CEPS Working Paper No. 91, https://s3.amazonaws.com/academia.edu.documents/32122406/.
Musembi, M., Simiyu, E., & Njoka, C. (2020). Symmetric and Asymmetric effect of investor sentiment on performance of equity market in Nairobi Securities Exchange. International Journal of Services Technology and Management, 8, 438-447.
Onsomu, Z. N. (2014). The impact of behavioural biases on investor decisions in Kenya: male vs female. Impact: International Journal of Research in Humanities, Arts and Literature, 2(6), 87-92.
Onsomu, Z. N., Kajiage, E., Aduda, J., & Iraya, C. (2017). Risk tolerance, demographics and portfolio performance. Journal of Business & Economic Policy, 4(3), 69-74.
Rashid, A., Fayyaz, M., & Karim, M. (2019). Investor sentiment, momentum and stock returns: an examination of direct and indirect effects. Economic Research-Ekonomska Istrazivanja, 32(1), 2638-2656.
RBS Morgan. (2019). RBS Morgan Risk Profile questionnaire. JP Morgan, www.rbsmorgans.com.
Rajararan, V. (2003). Investor's demographics and risk bearing capacity. Finance India, 27(2), 565-576.
Sayim, M., Morris, P. D., & Rahman, H. (2013). The effect of US individual investor sentiment on industry specific stock returns. Review of Behavioural Finance, 5,1, 58-76.
Sekaran, U., & Bougie, R. (2016). Research methods for business: A skill building approach, 7th edition. Chichester, West Sussex, United Kingdom: John Wiley & Sons.
Shefrin, H. (2008). Risk and return in behavioural SDF-based asset pricing models. Journal of Investment Management, 6(3), 1-18.
Shleifer, A., & Summers, L. H. (1990). The noise trader approach to finance. Journal of Economic Perspectives, 4(2), 19-33.
Sreenu, N., & Naik, S. (2021). Investor sentiment and stock return volatility: evidence from the Indian Stock Exchange. Asia-Pacific Journal of Business Administration, https://doi.org/10.1108/APJBA-11-2020-0405.
Trueman, B. (1988). A theory of noise trading in securities markets. The Journal of Finance, 43(1), 83-95.
Wooldridge, J. M. (2010). Econometrics analysis of cross section and panel data. London: The MIT Press.
Zhang, C. (2008). Defining, modelling, and measuring Investor Sentiment. University of California, http://citeseerx.ist.psu.edu/viewdoc.
Published
2023-09-08
How to Cite
Saiti, K., Mwangi, C. I., Okiro, K., & Gathiaka, K. (2023). SENTIMENT, RISK APPETITE AND STOCK RETURNS OF INDIVIDUAL INVESTORS AT THE NAIROBI SECURITIES EXCHANGE. African Journal of Emerging Issues, 5(12), 87 - 101. Retrieved from https://ajoeijournals.org/sys/index.php/ajoei/article/view/470
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