Some evidence from a principal component approach to measure a new investor sentiment index in the Tunisian stock market
Authors: Bouteska Ahmed 
Published: January 2020

Purpose
The purpose of this paper is to study a novel and direct measurement of investor sentiment index in the Tunisian stock market that overcomes the weaknesses of a well-known investor sentiment index by Baker and Wurgler (2006, 2007).

Design/methodology/approach
Based on the data of 43 firms of the Tunisian stock market index (Tunindex) over the period 2004–2016, the author constructs a monthly investor sentiment that reflects both the economic fundamentals and the investor sentiment components. Seven indirect indicators collected from investor sentiment literature and Tunisian stock exchange were analyzed. Specifically, after accounting to remove the sentiment component for macroeconomic factors, the author estimates each sentiment proxy with a number of controlling variables. The residual from the estimation is used to define the author’s measure of excessive investor sentiment. To determine the best timing of sentiment indicators, the author employs a factor sentiment series as the first principal component of these total seven sentiment proxies and their lags of a month. Furthermore, by capturing the highest saturations with the first factor analysis, the author regressed each selected indicator’s lead or one-month lag in a second linear principal component analysis to reach the author’s Tunisian market’s total sentiment index.

Findings
The results show that all employed indicators may reflect the investor sentiment on the Tunisian stock market. The findings also indicate significant evidence that the author’s sentiment index takes into consideration the political and economic events such as the Jasmine Revolution experienced by Tunisia during the period from January 2, 2004 to December 30, 2016. Moreover, investor sentiment index flow appears to be one leading mechanism for the performance of Tunindex.

Originality/value
Results found have clearly shown that the author’s seven indirect indicators can reflect investor sentiment in the Tunisian context. The various sentiment proxies are bullish indicators of investor sentiment. Brown and Cliff (2004) argue that the higher bull/bear ratio, the more investor sentiment is bullish. An important value of price–earnings ratio implies that the level of investor confidence as for change in market is also important. Liquidity measured by trading volume, market turnover ratio and liquidity ratio reflects individual investor sentiment. Otherwise, it seems that investors only invest when they are optimistic and reduce market liquidity once they became pessimistic. The monthly response rate to initial public offerings (IPOs) represents a bullish sentiment indicator. Indeed, the more optimistic investors are, the higher the response rate to IPOs. Investor satisfaction also reflects investor sentiment. In other words, a high level of satisfaction translates an important level of optimism. In addition, the author also recognizes that the authors’ Tunisian sentiment index follow general trend of stock market prices and appears to be an important determinant of Tunindex returns during the period of study, from January, 2004 to December, 2016. The author suggests investor sentiment can help predict Tunindex returns, distinguishing between turbulent and tranquil periods in the financial market. The graphical illustration of monthly investor sentiment index shows that it captures extreme events such as the Tunisian revolution of January, 2011, also known as the Jasmine revolution which marked the start of the Arab Spring and the consequences of economic and political turmoil in Tunisia that have disrupted economic activity in the next few years. Like all research work, the current research paper has certain limitations. The choice of control variables allowing the author to separate sentiment component of that fundamental might be criticized. Moreover, there is no unanimous number of control variables but they are chosen according to data availability. The author also believes that one of the study’s weaknesses is that the author has not examined the impact of investor sentiment on the Tunisian stock market. For future interesting avenues of research, the author proposes, first, to study the effect of investor sentiment on financial asset returns and check, second, if sentiment factor constitutes an additional source of business risk valued by the marketplace.