Investor confidence, macroeconomic forces and the performance of stock market- an empirical investigation of the Pakistan stock market

This study investigates investor confidence and the macroeconomic factors contributing to the Stock market performance in Pakistan during the period 1997- 2012. We find that: (1) Macro economic variables play an important role in explaining stock market performance in Pakistan. (2) The effects of macroeconomic variables on the stock market performance across different sectors, different firm sizes, and different risk portfolios are somewhat different. (3) Historical stock return volatility significantly influences the current stock market volatility; and historical volatility shocks drive volatility changes in all sectors of the stock market. (4) Investor sentiment exhibits explanatory power in capturing financial market anomalies such as the size, sector momentum effect and betas of the firm. Particularly, there is a positive association between investor confidence and stock returns, and the majority of variations in stock returns are explained by the investor sentiment index. (5) The sensitivities of the stock market performance are different across different industries. (6) The findings also indicate that risky portfolio returns are more sensitive to the investor confidence, and vice versa. (7) Similarly, the large firms are less sensitive, where small firms are highly sensitive to the investors’ confidence. The findings let us to conclude that high risk firms and small firms are hard-to-arbitrage. Our findings facilitate policy-makers and practitioners to understand the importance of investor sentiment and take remedial measures to build confidence among investors.