SENTIMENT RETURN DYNAMICS IN BRICS EQUITY MARKETS

Abstract

This study investigates the dynamic interplay between investor sentiment and financial market performance within the BRICS equity markets (Brazil, Russia, India, China, and South Africa) across multiple timeframes (daily, weekly, and monthly) from the period of year 2004 to year 2022. Utilizing households google search trends, we construct daily, weekly, and monthly investor sentiment to empirically examine several key areas at various time frames: first, the co-movement between investor sentiment and equity returns, second, the predictive capacity of our investor sentiment towards equity returns, and the reversion of investor sentiment over time. The findings reveal a positive concurrent relationship between investor sentiment and market returns across all examined timeframes through panel data analysis and robust testing using the Generalized Method of Moments approach. Notably, results indicate that sentiment serves as a contrarian predictor for country-level returns, with a tendency for sentiment-driven gains or losses to revert in subsequent periods, suggesting a reversion rather than persistence of sentiment especially in daily and monthly analysis. This behavior underscores the significant role of psychological factors and behavioral biases in shaping market trends within emerging economies. Furthermore, our study's findings emphasize the importance of incorporating investor psychology into financial analysis, particularly in the context of portfolio allocation and risk management strategies in these markets. This research contributes valuable insights for investors, policymakers, and financial regulators, highlighting the intricate relationship between behavioral factors and market dynamics in emerging economies and offering potential avenues to mitigate risk and enhance decision-making in the BRICS financial markets, where volatility and rapid sentiment shifts are crucial.