Determinants of Stock Returns: The Role of Bond Yield Spread and Gold Bullion as Investor Sentiments
Abstract
The role of financial information is the reference point in the capital market to assess the strength and profitability of a firm. Financial markets, including the Pakistan Stock Exchange (PSX), are influenced by investor sentiments, which interplay with perceptions, emotions, and behavioral biases to drive stock prices. The behavioral finance approach of bounded rationality of investors is considered to determine the impact of bond yield spread on asset price for a longer period. Moreover, investors have traditionally used gold as a hedge against inflation; however, from the perspective of portfolio management, it can be seen to offer the benefits of diversification and protection against exchange rates. This research aims to investigate the relationship between investor sentiments and stock returns in the Pakistani stock market. Investor sentiments are quantified using novel proxies such as bond yield spread and gold bullion. The sample size covers data from 49 non-financial firms from 2012 to 2019 quarterly, covering 1467 observations. The Fully Modified Ordinary Least Square method is used in the study for the hypotheses testing. The results for two hypotheses of investor sentiments’ proxies are accepted. The findings confirm that bond yield spread and gold bullion significantly impact stock returns. The policy implication of this study is to understand that biases and economic conditions influence investor sentiments. Investors, policymakers, and government officials make informed decisions, which can reduce market volatility and improve financial stability. Additionally, increasing financial literacy and making market data accessible can mitigate the impact of irrational investment decisions, fostering a more efficient market. This study's limitations include the exclusion of non-listed and financial firms, reliance on the KSE-100 index, and the use of advancing and declining stock counts rather than their magnitudes. Future research should address crisis periods, examining the sector-specific impact of investor sentiments, and considering business cycle stages to understand stock market volatility.
Key words: Bond Yield Spread, FMOLS, Gold Bullion, Investor Sentiment, Stock Returns
