Impact of Investor Sentiment on the Stock MarketGroup members:Mukund Prasad JoshiNawanit SharmaRakesh Chandra AdhikariSuraksha Koirala1. BackgroundAn important subfield of finance, behavioral finances uses insights from the field of psychology and applies them to the actions of individuals in trading and other financial applications.(Farlex Financial Dictionary, 2009) Behavioral Finance is defined by Shleifer (1999) as, a rapidly growing area that deals with the influence of psychology on the behavior of financial practitioners. Behavioral Finance assumes that information structure and the characteristics of market participants systematically influence individuals investment decisions as well as market outcomes. It mainly focuses on how investors interpret and act on micro and macro information to make investment decisions.The investor sentiment is a concept key in behavioral finance; it has attracted the interest of many researchers during the last decade.(Boubaker, 2014). The Investors sentiment can be defined as investors attitude and opinion towards investing in the Stocks. (E. Bennet and M. Selvam, 2011) Wave of investor sentiment has larger effects on securities whose valuations are highly subjective and difficult to arbitrage. (Wurgler, 2006).1.1 Empirical Studies(Wurgler, 2007) Study outlined a top down approach to behavioral nance and the stock market. It showed that it is quite possible to measure investor sentiment, and waves of sentiment have clearly discernible, important, and regular effects on individual rms and on the stock market as a whole. (Claudia Emiko Yoshinaga, 2012) Study result indicated a significant and negative relationship between the market sentiment index and the future rates of return. The findings suggested the existence of a reversion pattern in stock returns.Though various researches have been done on the investor sentiments in the world it is very less in the case of Nepal. (Thapa, 2013) found thatincrease in the size of investment leads to decrease in the confidence level of investors. Size of investment hassignificantly positive impact on the level of involvement and negative effect on investors optimism; higherprofessional experience of investors tends to increase risk taking capacity while investors with large investmenthave lower tendency to take risk. Similarly, investors having higher level of confidence, involvement, optimism andrisk taking attitude tend to trade more frequently in the stock market. Thus, investment behavior of investors is highly influenced by their personal characteristics and psychology.1.2 Objective of the Study:The objective of this report is to examine the impact of investors sentiment on the equity market in Nepal. 2. Research Methodology2.1 Data Collection The instrument used for this study consists of six constructs (independent variables), namely, herd behaviour of investors, internet led access to information and trading, macro economic factors, risk and cost factor, performance factor and confidence level of institutional investors, best game in town and investors optimism is taken as a dependent variable. These six constructs were already developed and validated by Shillers (1999) and used by VandanaSinghvi (2001) Bennet Ebenezer (2011)(E. Bennet, 2012). 2.1.1 Market Factors / Variables That Influence Investors Sentiment The market factors that influence the investors sentiment are briefly described below: Herd Behavior refers to similarity in thinking among individual investors. It describes how individuals in a group can act together without planned direction. If well informed and experienced investors invest in a particular stock, the other investors, without analyzing the market and other factors, would also follow the same. Internet Led Access to Information and Trading (ILA): It is generally felt that the new generation of investors are techno-savvy, self-reliant and buy and sell like professionals. The internet has facilitated easy, low cost and speedy access to information and trading. Brad M Barber and Terrance Odean (2001) found that the internet has changed the process of how information is delivered to the investors and the ways in which investors can act on that information. The ILA has lowered both the fixed and marginal costs of producing financial services, thus enabling newer, smaller companies to challenge established providers of these services. The Macro Economic Factors (MEF) that could influence the investors attitudes towards investment in Nepal is Interest Rate, Rate of Inflation, and Unemployment Rate. Mark J. Flannery Aris A. Protopapadakis (2002) found that the stock market returns were significantly correlated with inflation and the money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish. Risk and Cost Factors (RCF): Investors have identified two factors as most important; the first one is cost cutting at the operations level and the second being technological advancement. Similarly they also identified two aspects of risk that influenced the investors attitude. First investors believe that higher the risk, higher the return. Secondly, investors view the stability and the able governance of the Government as an important factor influencing their faith in the Stock Market.Best Game in Town(BG): The Stock Market is considered as the only best place attracted to invest and it has become a national pastime and hence it is considered as the Best Game in Town. An attempt is made in this study to examine the market specific factors that influence the investors sentiment to invest in stock market. All the above five market factors are considered in this study as independent variables. 2.2 Hypothesis of the StudyInvestors optimism nothing can go wrong attitude is that they believe the stock prices to rise for the next 12 months; plan to increase their investment in the Nepalese Stock Market for the next 12 months alsoand still invest in crisis situation. Hence the following hypothesis was formulated and tested. Investors optimism is influenced by Herd Behavior of Investors (HB), Internet Led Access to Information and Trading (ILA), Macro Economic Factors (MEF), Risk and Cost Factor (RCF), and Best Game in Town (BG). 2.3 Sources of DataThe research design for the study was descriptive in nature. The researchers depended heavily on primary data. The required data were collected from the retail investors living in Kathmandu through a questionnaire Survey. The study was conducted during February, 2014. 2.3.1 Sampling Size and ProcedureThe sampling design was carefully decided and properly chosen for the study. The sample size covered 35 retail investors spread through three different investment centers in Kathmandu. This study used Purposive Sampling Method. 3. Data Analysis Reliability test:Cronbachs alpha is a statistic. It is generally used as a measure of internal consistency or reliability of a psychometric instrument. When items are used to form a scale they need to have internal consistency. The items should all measure the same thing, so they should be correlated with one another. Cronbach's alpha generally increases when the correlations between the items increase. For this reason the coefficient is also called the internal consistency or the internal consistency reliability of the test.Here the questionnaire used also forms a scale so to check the internal consistency of the data reliability test is done. The tables 1 to 6 show the correlation of the data and Cornbachs alpha is measured to check the consistency of the data. The alpha of each factor is high which shows that there is high internal consistency among the data.

Table 1: Corrected Item- total correlation for Investor OptimismVariablesCorrected Item-Total Correlation

Stock price in Nepal will rise in the next 12 months.267

I will stay invested in the Nepalese stock market even during crisis.026

I plan to increase my investment in the Nepalese stock market in the next 12 monthsCornbachs alpha.397.370

Source: Calculated from primary data using SPSSTable 2: Corrected Item- total correlation for herd behavior of investorsVariablesCorrected Item-Total Correlation

Stocks are methods for easy money.102

Get rich quick philosophy exists among the investors.003

Greed among investors creates unhealthy market-.147

Media focus on stock market has increased investments in the stocks.333

I invest by looking at the stories of successful investorsCornbachs alpha-.059.056

Source: Calculated from primary data using SPSSTable 3: Corrected Item- total correlation for risk and cost factorsVariablesCorrected Item-Total Correlation

Political stability.534

Investor's tolerence for risk.587

Technological advancement at company levelcornbachs alpha.543 .719

Source: Calculated from primary data using SPSSTable 4: Corrected Item-total correlation for internet led access to information and tradingVariablesCorrected Item-Total Correlation

On-line trading is beneficial.475

Dissemination of information is fast and cheaper.428

Access to tools and technology via the internet is fast.591

Executing a trade online is easy and less costlyCornbachs alpha.474.702

Source: Calculated from primary data using SPSSTable 5: Corrected Item- total correlation for best game in townCorrected Item-Total Correlation

Can't depend on provident fund/ gratuity/ post office savings etc..604

Low rate of return in government bonds.721

Target savings rate is very low.557

Stock market is the only place attractive to investCornbachs alpha.224.717

Source: Calculated from primary data using SPSS

Table 6: Corrected Item- total correlation for macro-economic factorsCorrected Item-Total Correlation

Market interest rate.653

Rate of inflation.850

Value of other major currency (like dollar).730

Strength of national economyCornbachs alpha.438.831

Source: Calculated from primary data using SPSS

3.1 Testing of hypothesis HypothesisMeanMean differenceStd. error meant-StatR square valueSig. (2-tailed)

H1 : IOHB11.257119.4857-8.228571.36713-6.019.209.000

H2: IORCF11.257112.4857-1.22857.45851-2.680.011

H3: IOILA11.257115.3714-4.11429.61051-6.739.000

H4: IOBG11.257115.2286-3.97143.70709-5.617.000

H5:IOMEF11.257114.4571-3.20000.64143-4.989.000

The t - test was used to test the relationship between the independent (market specific factors) and dependent variables (IO). The results of t test analysis for market specific factors and investor optimism are given in Table 7. Table 7: Paired test for the model

H1: Investors optimism is influenced by herd behaviour (HB)The path linking HB to the extent of usage of IO was found to be insignificant at 0.05 level (t=0.000). This indicates that HB did not influence the extent of usage of IO in Investors Sentiment.H2: Investors optimism is influenced by risk and cost factors (RCF) As given in Table 8, the path linking RCF to the extent of usage of IO was insignificant at 0.05 level (t= 0.011). This indicates that RCF did not influence the extent of usage of IO in investors sentiment. H3: Investors optimism is influenced by internet led access to information and trading (ILA)According to the Table 7, the path linking ILA to the extent of usage of IO was insignificant at 0.05 level (t= 0.000). This result reveals that internet led access to information and trading did not influence the investor optimism. H4: Investors optimism is influenced by macro-economic factors (MEF).The path linking MEF to the extent of usage of IO was found to be insignificant at 0.05 level (t= 0.000). This indicates that MEF did not influence the investor optimism. H5: Investors optimism is influenced by best game in town (BG). It is found that the path linking BG to the extent of usage of IO was negatively significant at 0.05 level (t= 0.000). This indicates that IO was not influenced by BG.Out of five market specific factors, four factors, namely, herd behavior (HB), internet led access to information and trading (ILA), macro-economic factors, registered positive and significant relationship with the dependent variable of IO. But the last factor namely best game in town (BG) recorded inverse relationship with the dependent variable of IO.

Table 8: Correlation for the hypothesesHypothesisIndependent variableDependent variablePearson CorrelationSig.(2 tailed)

H1HB.238.169

H2RCF.402.017

H3ILAIO.298.082

H4BG.117.503

H5MEF.320.061

Correlation between IO and RCF is significant at 0.05 level others are insignificant. Table 8 a correlation of 0.238 between IO and HB indicates that the variables in the first hypothesis are linearly related and since the correlation value is close to 0, it is also indicative that the relationship is not significant. Similarly, a correlation of 0.402 in the second hypothesis IO and RCF indicates there is no significant relationship between these dependent and independent factors, since the correlation value is near to 0. The correlation of 0.298 in the third hypothesis IO and ILA also indicates that there is no significant relationship between these dependent and independent factors. Similarly, a correlation of 0.117 in the fourth hypothesis IO and BG indicates there is no significant relationship between these dependent and independent factors, because the value is near to zero. Similarly, a correlation of 0.320 in the fifth hypothesis IO and MEF indicates there is no significant relationship between these dependent and independent factors.4. DiscussionAs stated earlier, herd behaviour (HB) refers to the similarity in thinking among individuals. If well informed and experienced investors invest in a particular stock, then the other investors would also follow the same. This study also found that HB influences the investors optimism. This could possibly be due to the knowledge level of the investors. The new generation investors buy and sell stocks like professionals. The internet has facilitated easy, low cost and speedy access to information and trading. The finding of this study shows that investors optimism is also influenced by internet led access to information and technology. According to our study, variables under macroeconomic factors (MEF) namely, interest rate, rate of inflation and strength of Nepalese economy influenced investors attitude towards investing in Nepal. It is found in our study that risk and cost factors also influenced the investors optimism. Similarly macro economic factors also do influence the investors optimism. In the same way, IO is influenced by the belief that there is no alternative investment option other than the stock market. The stock market is considered as the best game in Town. 5. ConclusionThe investors feel that the stock prices in Nepal will rise for the next 12 months. Besides, the investors are again optimistic about Nepalese Stock markets ability to bounce back and view easy access to tools and technology via the internet and the low cost of trading as a contributory factor. As witnessed in the stock market in the past few years, individual investors looked for buying opportunities each time a favorite stock fell. Since the cost of trading is low, the investors would buy each time the price dipped. This ensured that any minor dips are unsustainable for these stocks. The investor optimism is reflected in the belief that there is no alternative investment option other than the stock market and the stock market is the best game in town. It is also found from the interactions with selected investors that Provident Fund and Gratuity would not be able to cover the investors old age / retirement life and they think that stock market is the only sector whose return can beat the impact of inflation. Therefore to manage the retirement / old age, the investors know that they would need to save and invest in stock market. Out of various vehicles to invest, the investors find the Nepalese stock market to be very attractive. The low returns offered by banks, government bonds etc. make them relatively unattractive and persuade them to invest in stocks.

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