Investor Sentiment and Market Performance in India: Evidence from the NIFTY 50 Index

Abstract

Investor sentiment has emerged as a crucial behavioral factor influencing asset pricing, particularly in emerging markets characterized by retail participation and informational inefficiencies. This study constructs a composite investor sentiment index for India using five indirect market-based proxies—price–earnings ratio, buy–sell imbalance ratio, number of IPOs, market turnover, and equity issues in total issues. Monthly data from April 2014 to March 2024 are employed, and NIFTY 50 returns are used as the benchmark market return. Principal Component Analysis (PCA) is applied to develop the sentiment index after confirming sampling adequacy through the Kaiser–Meyer–Olkin (KMO) test and Bartlett’s Test of Sphericity. Ordinary Least Squares (OLS) regression is used to examine the predictive relationship between sentiment and stock returns. The results reveal a statistically significant positive relationship between investor sentiment and NIFTY 50 returns. The findings provide empirical support to behavioral finance theories in the Indian context and offer useful implications for investors and policymakers.