Investor Sentiment and Stock Market Returns in Nigeria

Abstract

The Nigerian bourse is characterized by continual volatility and unpredictability that traditional macroeconomic models have failed to sufficiently explain this phenomenon. It is against this backdrop that this study examines the impact of investor sentiment on stock market returns in Nigeria. To achieve this, the study built an investor sentiment index (IVSI) using a Principal Component Analysis (PCA). It relied on the ex post facto research design to collated 38 observations of annual time series data spanning 1986 to 2024. Econometric analysis was conducted using descriptive statistics, the Augmented Dickey-Fuller unit root test, and ARCH/GARCH models, with a significance level of 5%. The results indicated that investor sentiment significantly affected stock market returns. Nevertheless, the GARCH model showed positive and significant volatility persistence, implying that past volatility contributed to current market volatility. The study concludes that investor sentiment was not an important factor in stock returns but did play a role in volatility. The study recommends enhanced market transparency and implementing risk management strategies based on volatility. The study contributes to the body of knowledge by integrating behavioural finance with volatility modelling in the Nigerian context.