Interaction between Stock Return and Retail Investor Sentiment on the Indonesia Stock Market

Elly Zunara, Noer Azam Achsani, Dedi Budiman Hakim, Roy Sembel


This study investigated the relationship between retail investor sentiment and stock return in Indonesian markets. The examination was based on the firm size characteristics of the big, middle, and small stock indexes obtained from Morgan Stanley Capital Indonesia (MSCI). The study assessed the monthly statistics of the Indonesia Stock Exchange (IDX) on returns on the MSCI index and stock trading volume between January 2015 and January 2021 to analyze the influence of retail investor sentiment. Retail investor sentiment as an object of research has criteria, namely stock trading volume activity carried out by individual investors registered on the IDX. We find that retail investors' irrational sentiments should have a larger impact on all stock market return indexes than their rational sentiments and retail investors' irrational sentiments had the largest impact on the middle stock return index. We also document that the all-stock returns index is significantly and negatively impacted by investor sentiment. Unlike prior research, which placed all of the blame for the negative stock market sentiment on the irrational actions of investors, the new data lends credence to the thesis that underlying economic fundamentals drive stock market returns. Since both rational and irrational emotions affect stock returns, investors can enhance their portfolio performance by considering both. This research adds to the growing literature on behavioral finance regarding the impact of retail investor sentiment on the performance of all stock indices based on firm size characteristics and adds to the understanding of the impact of retail investor sentiment on stock returns, particularly in Indonesia as a representative of an emerging market.


Keywords: retail investor sentiment, Indonesia Stock Exchange, stock returns, error correction model, vector error correction model.



Full Text:



ALRABABA’A, A.R., & SAIDAT, Z. (2022). Volatility Forecasting after Removing the Noise: Does It Really Pay Off? Journal of Southwest Jiaotong University, 57(6), 529-543.

ASIANTO, A. (2019). The price determinants of west Texas intermediate crude oil. Jurnal Aplikasi Manajemen dan Bisnis, 5(1), 153-162.

BAKER, M., & STEIN, J.C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3), 271–299.

BAKER, M., & WURGLER, J. (2007). Investor sentiment in the stock market. Journal of Economic Perspectives, 21(2), 129-151.

BARBERIS, N., & THALER, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance, 1, 1053-1128.

BARBERIS, N., SHLEIFER, A., & VISHNY, R. (1998). A model of investor sentiment. Journal of Financial Economics, 49(3), 307–343.

BERGER, D., & TURTLE, H.J. (2012). Cross-sectional performance and investor sentiment in a multiple risk factor model. Journal of Banking & Finance, 36(4), 1107–1121.

BLACK, F. (1986). Noise. Journal of Finance, 41(3), 529-543.

BROWN, G.W., & CLIFF, M.T. (2004). Investor sentiment and the near-term stock market. Journal of Empirical Finance, 11, 1–27.

CAMPBELL, J. (1991). A variance decomposition for stock returns. Economic Journal, 101(405), 157-179.

CAMPBELL, J.Y., & KYLE, A.S. (1993). Smart money, noise trading and stock price behaviour. Review of Economic Studies, 60(1), 1-34.

CHORDIA, T., ROLL, R., & SUBRAHMANYAM, A. (2001). Market liquidity and trading activity. The Journal of Finance, 56(2), 501–530.

DE LONG, J., SHLEIFER, A., SUMMERS, L., & WALDMAN, R. (1990). Noise trader risk in financial markets. Journal of Political Economy, 98(4), 703-738.

ELTON, E., & GRUBER, M. (1991). Modern Portfolio Theory and Investment Analysis. New York: John Wiley & Sons.

FAMA, E. (1970). Efficient capital markets: a review of theory and empirical work. Journal of Finance, 25(2), 383-417.

HAMILTON, J.D. (1994). Time Series Analysis. Princeton, New Jersey: Princeton University Press.

HIRSHLEIFER, D. (2001). Investor psychology and asset pricing. Journal of Finance, 56, 1533–1597.

JUANDA, B., & JUNAIDI. (2012). Ekonometrika Deret Waktu: Teori dan Aplikasi. Bogor: IPB Press.

KUMAR, A., & LEE, C.M. (2006). Retail investor sentiment and return comovements. Journal of Finance, 61(5), 2451-2485.

LEE, C.M.C., SHLEIFER, A., & THALER, R.H. (1991). Investor sentiment and the closed-end fund puzzle. Journal of Finance, 46(1), 75–109.

LEE, W.Y., JIANG, C.X., & INDRO, D.C. (2002). Stock market volatility, excess returns, and the role of investor sentiment. Journal of Banking & Finance, 26, 2277–2299.

LEMMON, M., & PORTNIAGUINA, E. (2006). Consumer confidence and asset prices: some empirical evidence. The Review of Financial Studies, 19(4), 1499–1529.

LIAO, T.L., HUANG, C.J., & WU, C.Y. (2011). Do fund managers herd to counter investor sentiment? Journal of Business Research, 64(2), 207–212.

LITTERMAN, R.B. (1984). Forecasting with Bayesian vector autoregressions. Federal Reserve Bank of Minneapolis.

MACKINNON, J.G., HAUG, A.A., & MICHELIS, L. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration. Journal of Applied Econometrics, 14(5), 563-577.

NGWAKWE, C.C. (2020). Effect of COVID-19 Pandemic on Global Stock Market Values: A Differential Analysis. Acta Universitatis Danubius (Economica), 16, 255–269. Retrieved from

PESARAN, M.H., & SHIN, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58, 17–29.

SHARPE, S. (2002). Reexamining stock valuation and inflation: the implications of analysts’ earnings forecasts. Review of Economics and Statistics, 84(4), 632-648.

SHEFRIN, H., & STATMAN, M. (1994). Behavioral capital asset pricing theory. Journal of Financial and Quantitative Analysis, 29(3), 323-349.

SHLEIFER, A., & SUMMERS, L. (1990). The noise trader approach to finance. Journal of Economics Perspective, 4(2), 19-33.

SIMS, C. (1980). Macroeconomics and reality. Econometrica, 48(1), 1-49.

TRUEMAN, B. (1988). A Theory of Noise Trading in Securities Markets. Journal of Finance, 43(1), 83-95.

TUYON, J., AHMAD, Z., & MATAHIR, H. (2016). The role of investor sentiment in the Malaysian stock market. Asian Academy of Management Journal of Accounting and Finance, 12(1), 43–75.

UYGUR, U., & TAS, O. (2012). Modeling the effects of investor sentiment and conditional volatility in international stock markets. Journal of Applied Finance & Banking, 2(5), 239-260. Retrieved from

VERMA, R., & SOYDEMIR, G. (2006). The impact of US individual and institutional investor sentiment on foreign stock markets. Journal of Behavioral Finance, 7(3), 128-144.

WEBB, R.H. (1999). Two approaches to macroeconomic forecasting. Economic Quarterly, 85/3, 23–40. Retrieved from

WIJAYA, L.I., & ZUNAIROH. (2021). Factor Analysis of Investor Behavior in Indonesian Stock Exchange during COVID-19 Pandemic. Journal of Hunan University Natural Sciences, 48(8), 243-254. Retrieved from

YANG, H., RYU, D., & RYU, D. (2017). Investor sentiment, asset returns and firm characteristics: Evidence from the Korean Stock Market. Investment Analysts Journal, 46(2), 132–147.

ZHU, B., & NIU, F. (2016). Investor sentiment, accounting information and stock price: Evidence from China. Pacific-Basin Finance Journal, 38, 125–134.

ZUNARA, E., ACHSANI, N.A., HAKIM, D.B., & SEMBEL, R. (2022). The effect of rational and irrational sentiments of individual and institutional investors on Indonesia stock market. Jurnal Aplikasi Manajemen dan Bisnis, 8(3), 802-815.


  • There are currently no refbacks.