ASSESSING THE ROLE OF INVESTOR SENTIMENT IN PREDICTING ASSET PRICING IN EMERGING MARKETS: EVIDENCE FROM KENYA

Abstract

This paper investigates the impact of investor sentiment on asset pricing in Kenyan equity markets. The study aims to explore whether the effect of profitability risk on stock returns varies with the level of investor sentiment in the Kenyan equity market. The results show that the profitability risk factor significantly predicts stock returns at a 5% level. However, the coefficient on profitability risk factor is negative, indicating that a high exposure to profitability risk leads to low returns. The study also reveals that incorporating sentiment variables to the main effects model would enhance the significance of the profitability risk factor. The findings contribute to investment strategies, determining required rates of return, and evaluating portfolio performance of collective investments. The study's evidence provides insights for individual and institutional investors and financial regulators in understanding the dynamics of asset pricing in the Kenyan equity market