Investor Attention and Stock Market Returns: Empirical Evidence from Pakistan

The aim of this study is twofold. First, it constructs an investor attention index from seven variables: abnormal trading volume, extreme returns, past returns, nearness to the 52-week high, nearness to the historical high, google search volume, and mutual funds inflow and outflow, using principal component analysis (PCA) approach. Second, the study examines the impact of the investor attention index on the KSE-100 index returns. For this purpose, we collect monthly data from January 2000 to June 2020. The PCA identified four components: PCA1 comprises extreme returns, past returns, google search volume, and mutual funds inflow; PCA2 consists of nearness to the 52-week high, abnormal trading volume, past returns, and Google search volume; PCA 3 includes nearness to the historical high, abnormal trading volume, past returns, and google search volume, and PCA 4 comprises nearness to the 52-week high, extreme returns, and mutual funds inflow and outflow. The PCA1 and PCA3 negatively but significantly impact KSE-100 index returns. Consequently, PCA2 and PCA4 positively and significantly impact KSE-100 index returns. The findings of this study have important implications for policymakers, investors, and mutual fund managers to understand the patterns of investor attention, creating policies and procedures to make the financial markets more transparent and protect the investor’s rights.